chapter 16 econ

Debt is to deficit as a. money is to income. b. flow is to stock. c. rent is to dividend. d. property is to wealth.

a

A budget surplus exists when a. Tax receipts < government expenditures + transfers. b. Tax receipts > government expenditures + transfers. c. Government expenditures − transfers > tax receipts. d. Government expenditures > transfers + tax receipts.

b

A chart of the ratio of national debt to GDP from 1915 to 2010 would show a. significant increases from 1945 to 1975. b. significant increases during World Wars I and II. c. a larger value in 1975 compared to 1945. d. significant increases from 1995 to 2003.

b

The national debt a. is increased by budget surpluses. b. is the value of the government's indebtedness at a moment in time. c. exceeded $20 trillion in 2010. d. All of the above are correct.

b

The policy mix that the Clinton administration sought in early 1993 was a a. smaller budget deficit and tighter monetary policy. b. smaller budget deficit and looser monetary policy. c. larger budget deficit and looser monetary policy. d. larger budget deficit and tighter monetary policy.

b

The purpose of fiscal policy should be to a. balance the budget to be fiscally responsible. b. balance aggregate supply and aggregate demand. c. keep taxes low to keep voters happy. d. minimize government spending to avoid wasting money.

b

The statement that "repaying our enormous national debt will ruin the nation" is a. true, because taxes will have to go up by such large amounts that American citizens will have very little income to live on. b. true, because most of our national debt is owed to foreigners. c. false, because the government will take emergency measures to prevent national bankruptcy. d. false, because each time the principal on the debt comes due, the U.S. Treasury rolls it over by issuing more debt.

b

The structural deficit can be defined as a. the deficit that is structurally obstructing economic recovery to reach level of high employment. b. a hypothetical construct that estimates the deficit, given current tax rates and expenditure policies, if the economy were operating at some fixed high-employment level. c. the deficit necessary to restructure the economy and reach a desired high-employment level. d. the deficit that would prevail if fiscal policy were structured differently in order to reach a desired high-employment level.

b

A chart of the ratio of national debt to GDP from 1915 to 2010 would show a. a continuous decline. b. sharp increases from 1945 to 1975. c. significant increases from 1980 to 1995. d. significant decreases from 2003 to 2010.

c

Compared to the size of GDP in 2010, the net national debt was approximately a. 10% as large. b. 33% as large. c. 60% as large. d. about twice as large.

c

The government should not attempt to balance the budget if a. the economy is in a recessionary gap. b. actual GDP is below full-employment GDP. c. unemployment is rising. d. All of the above are correct.

d

Which of the following is true regarding the effect of deficits from 1980-2005 in the U.S.? a. They did not lead to substantial inflation because the Fed did not monetize the deficits. b. They did not lead to substantial inflation because the Fed did monetize the deficits. c. They led to substantial inflation because the Fed did not monetize the deficits. d. They led to substantial inflation because the Fed did monetize the deficits.

a

Suppose that the economy is currently at full employment. All other things being equal, if the government implements expansionary fiscal policy, then the appropriate monetary policy is a. no change from the current policy. b. reduce the growth of the money supply. c. constant growth of the money supply. d. increase the growth of the money supply.

b

The U.S. government need never default on its debt because a. it can easily nationalize banks, who own all the debt, and then owe it to itself. b. it can raise the funds it needs to repay by taxation, and it can print money to repay. c. it owes the debt to itself, and it can always ignore a demand for repayment. d. it can simply reduce spending enough to generate funds to repay its debt.

b

Under a balanced budget policy, a sharp rise in GDP will cause a. no serious budget changes. b. a tax cut or an increase in expenditures. c. a tax increase or expenditure cut. d. tax receipts to exceed government expenditures.

b

Until the 1980s, most of the national debt was a. owned by foreigners. b. acquired either during wars, especially World War II, or during recessions. c. owned by banks. d. financed by printing money.

b

Which of the following statements about the national debt has the most validity? a. Our large national debt can bankrupt the nation. b. If only Americans hold the debt, then payments of interest and principal are simply transfers from some Americans to other Americans. c. Our large national debt can lead to subjection by the people (especially foreigners) who hold the debt. d. The national debt represents a burden to future generations who will have to make huge payments of interest and principal.

b

Why do economists think that the structural deficit is a good measure of the direction of fiscal policy? a. Because it adjusts over the business cycle, and reflects the fiscal stimulus of policy. b. Because it changes when policy changes, rather than when the economy changes. c. Because it changes when monetary policy changes, reflecting the interest rate cost of debt. d. Because it adjusts automatically, rather than requiring specific legislation.

b

With no change in fiscal policy, the budget a. will run a surplus during a recession and a deficit during a boom. b. deficit will rise during a recession and fall during a boom. c. deficit will fall during a recession and rise during a boom. d. will remain unchanged by adverse economic conditions.

b

Appropriate fiscal policy depends on the other major tool of governmental stabilization policy: a. trade policy. b. tax policy. c. monetary policy. d. labor market policy.

c

Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 16-2 from D0D0 to D1D1. Fiscal authorities who wish to restore real GDP to the full-employment level will a. run a budget surplus by increasing taxes or cutting government spending. b. run a balanced budget to prevent the interest rate from rising and cutting off investment. c. run a budget deficit by cutting taxes or increasing government spending. d. ignore the change in monetary policy since it has no effect on fiscal policy.

c

Between the years of 2001 and 2003, what happened to the structural deficit? a. It declined rapidly. b. It fell steadily. c. It increased steadily. d. It remained fairly constant.

c

Budget deficits are inflationary when a. the Federal Reserve contracts the money supply. b. the economy has lots of slack and the aggregate supply curve is horizontal. c. the economy is at full employment and the aggregate supply curve is vertical. d. private citizens buy the bonds to finance the debt.

c

Deficit is to debt as a. responsible is to irresponsible. b. increase is to decrease. c. flow is to stock. d. important is to unimportant.

c

During the late 1980s and early 1990s, most of the budget deficits were accounted for by a. the decline of foreign investment in the United States. b. the downturn in the economy. c. deliberate fiscal policy changes. d. All of the above are correct.

c

E. Carey Brown, an MIT economist, studied government deficits during the Great Depression and found that even though actual deficits were large, the structural deficit changed very little. Which of the following statements is consistent with this finding? a. Fiscal policy did not work during the Depression. b. Fiscal policy made the Depression worse. c. Fiscal policy was not tried during the Depression. d. Fiscal policy improved the economy during the Depression.

c

From 2004 to 2008, the federal budget deficit, on an official fiscal-year basis was a. large and growing larger. b. "negative," that is, the budget was in surplus. c. declining. d. increased by the rising Social Security deficit.

c

If the U.S. government decided to pay off the national debt by creating money, what would be the most likely effect? a. a substantial reduction in real GDP b. a deflationary collapse c. rapid inflation d. an increase in the trade surplus

c

If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to a. counteract inflation. b. reduce the trade deficit. c. continue inflationary pressures. d. increase unemployment.

c

In 2010 and 2011, many observers were worried that the a. budget would not be balanced and fiscal stimulus would be withdrawn too soon. b. budget would not be balanced and monetary stimulus would be withdrawn too soon. c. budget would be balanced and fiscal stimulus would be withdrawn too soon. d. budget would be balanced and monetary stimulus would be withdrawn too soon.

c

In Figure 16-1, there are four levels of income. G is government expenditures and TT is taxes less transfers. Y3 is the full-employment level of income. At Y3 a. there is an official deficit but a structural budget balance. b. there is a structural deficit but an official budget surplus. c. the official and structural deficit are in balance. d. both the official and structural budgets show a deficit.

c

In comparing the changes in actual budget surplus and the structural surplus between 1993 and 1999, it is clear that the a. actual surplus rose less than the structural surplus. b. actual surplus and the structural surplus rose about the same. c. actual surplus rose much more than the structural surplus. d. tax increases of 1993 decreased the structural surplus more than they decreased the actual surplus.

c

In contrast to Argentina in 2001, the United States debt is less of a burden because the U.S. debt is a. an obligation to pay over a longer period of time. b. owed entirely to U.S. citizens and banks. c. an obligation to pay in domestic currency. d. an obligation to pay in foreign currency.

c

Japanese Prime Minister Ryutaro Hashimoto was called the "Herbert Hoover of Japan" because he a. looked like a very distinguished politician. b. advocated vast public works to combat unemployment. c. advocated budget deficit reduction in the midst of a recession. d. advocated easier monetary policy and lower interest rates to combat recession.

c

Proper inflation accounting is necessary to measure the size of the real deficit because a. as a lender, the government gains from inflation. b. otherwise, the deficit is understated in inflationary times. c. the government is a borrower that pays back dollars of less real value in inflationary times. d. interest payments tend to fall in inflationary times.

c

The United States need never pay off the national debt; it can simply refinance the debt when it comes due. The flaw in thinking that the government must pay it off is based on the fallacy of a. benefit-cost ratio. b. post hoc, ergo propter hoc. c. composition. d. a priori expectations.

c

The budget deficit a. is the value of the government's indebtedness at a moment in time. b. was $13.5 trillion in fiscal 2010. c. is the amount by which the government's expenditures exceed receipts during a specific time period. d. All of the above are correct.

c

The budget deficits of the 1980s and early 1990s differ from others in the post-World War II era in that they were a. a result of the Fed rather than a change in fiscal policy. b. temporary rather than structural, and pose no threat to the economy. c. not contracted to fight a war or end a recession. d. contracted as part of a program to plan the economy.

c

The deficit can be defined in simple terms as a. Tax receipts − government expenditures + transfers. b. Tax receipts + government expenditures + transfers. c. Government expenditures + transfers − tax receipts. d. Government expenditures − transfers − tax receipts.

c

The national debt is defined as the total a. amount that U.S. citizens owe to foreigners. b. value that U.S. citizens borrow from foreigners during any time period. c. value of government's indebtedness at any moment in time. d. amount by which government's expenditures exceed receipts during any time period.

c

The net national debt is smaller than the gross national debt because a. some debt is held by foreigners. b. some debt is held by U.S. citizens. c. some debt is held by government agencies. d. the government does not have to pay all of the debt.

c

The principal difference between conventional accounting and economic analysis of inflation is that a. accountants adjust nominal values for inflation. b. accountants adjust real values for inflation. c. economists adjust nominal values for inflation. d. economists adjust real values for inflation.

c

The structural deficit is defined as a. that part of the deficit that is so hard to remove that it is never reduced. b. the portion of the budget deficit that occurs because the economy is not at full employment. c. the hypothetical deficit the economy would have under current fiscal policies if the economy were operating near full employment. d. the actual budget deficit that exists in the economy.

c

The structural deficit is equal to expenditures a. plus transfers less taxes for the fiscal year in government statistics. b. less taxes at some hypothetical high employment level. c. plus transfers less taxes at some hypothetical high employment level. d. less transfers for the fiscal year in government statistics.

c

The structural deficit or surplus a. shows the government where to make cuts in expenditures to follow the balanced budget requirement. b. reveals the complicated structure underlying government spending and tax policy. c. is the hypothetical deficit or surplus under current fiscal policies if the economy were operating near full employment. d. includes all government budgets-federal, state, and local.

c

To correct the budget deficit for inflation, we should a. multiply the budget deficit by the price deflator for GDP. b. subtract interest payments from tax revenues. c. divide the budget deficit by nominal GDP. d. divide the budget deficit by the consumer price index.

c

To maintain a balanced budget during the sag in personal spending in 2008 could cause a a. further increase in aggregate demand and inflation. b. further increase in aggregate demand and unemployment. c. further decrease in aggregate demand and a recession. d. further decrease in aggregate demand and inflation.

c

Under a balanced budget policy, a sharp decline in GDP will cause a. no serious budget changes. b. a tax cut or an increase in expenditures. c. a tax increase or expenditure cut. d. tax receipts to exceed government expenditures.

c

What happens typically to a budget deficit during an economic recovery? a. It decreases because of tax changes. b. It increases because of spending decreases. c. It decreases automatically. d. It increases automatically.

c

When will the difference between the actual deficit and the structural deficit be the smallest? a. in a major recession b. in a major recession c. at full employment d. in an inflationary gap

c

Which of the following statements is incorrect? a. Budget deficits raise the national debt. b. The concepts of deficit and debt are closely related. c. Getting rid of the deficit eliminates accumulated debt. d. Budget surpluses lower the national debt.

c

A budget deficit is best defined as the a. shortage of spending power created by a government spending cut. b. shortage of spending power created by a tax increase. c. accumulation of past debt that has not been covered by taxes. d. amount by which a government's expenditures exceed receipts during a specific time period.

d

A budget surplus is defined as the amount that the a. government owes to lenders at any moment in time. b. government spends in any time period. c. government's expenditures exceed receipts in any time period. d. government's receipts exceed expenditures in any time period.

d

A mathematical formula for the deficit would be a. C + I + G − Transfers + Taxes b. C + I + G + Transfers − Taxes c. I + G + Transfers − Taxes d. G + Transfers − Taxes

d

A recessionary gap causes national debt to increase because a. the growth in GDP slows. b. interest on previously incurred debt must be paid. c. recessionary periods require huge buildups of defense materials. d. income tax receipts drop off markedly.

d

At the end of 2010, the net national debt per person in the United States was approximately a. $14 trillion. b. $142 billion. c. $86,000. d. $43,000.

d

During the period from 1945 to 1975, the debt to GDP ratio a. remained steady. b. rose slightly. c. increased rapidly. d. fell steadily.

d

If the President and Congress agree to balance the budget during a recession, then the appropriate monetary policy is a. no change from the current policy. b. reduce the growth of the money supply. c. constant growth of the money supply. d. increase the growth of the money supply.

d

If the U.S. government decides to eliminate a budget surplus by reducing taxes, the most likely effect would be a. falling prices. b. a reduction in the trade deficit. c. an increase in unemployment. d. upward pressure on prices.

d

If the economy suffers a recession for reasons unrelated to fiscal policy, the deficit should rise and a. inflation should fall. b. interest rates should fall. c. real GDP should fall. d. All of the above are correct.

d

If the inflation rate falls, what will happen to the budget deficit? a. It will rise, because government spending will rise. b. It will rise, because interest payments will rise. c. It will fall, because tax receipts will increase. d. It will fall, because interest payments will fall.

d

If you wanted to measure changes in fiscal policy intentions, you should use the a. capital budget. b. actual deficit. c. inflation-accounted deficit. d. structural deficit.

d

In 2008 and 2009, the budget deficit increased substantially because of a. the weak economy. b. extraordinary spending. c. reduced tax receipts. d. all of the above

d

In 2009, the U.S. had a budget deficit of approximately a. $161 billion. b. $459 billion. c. $800 billion. d. $1.4 trillion.

d

In Figure 16-1, there are four levels of income. G is government expenditures and TT is taxes less transfers. At which level of income is the actual deficit the greatest? a. Y4 b. Y3 c. Y2 d. Y1

d

In contrast to the on-budget deficit, the off-budget deficit in 2009 was a. somewhat smaller. b. remaining constant. c. even larger. d. an actual surplus.

d

One of the principal reasons the Greek debt crisis of 2010 was so serious was because the Greek debt was a. an obligation to pay over a shorter period of time. b. owed entirely to U.S. citizens and banks. c. an obligation to pay in domestic currency. d. not an obligation to pay in domestic currency.

d

Suppose that the economy is currently at full employment. All other things being equal, if central bank implements contractionary policy, then the appropriate fiscal policy is to a. increase taxes. b. reduce government spending. c. balance the budget. d. increase a budget deficit.

d

Suppose that the economy is currently at full employment. All other things being equal, if the government implements restrictive policies then the appropriate monetary policy is a. no change from the current policy. b. reduce the growth of the money supply. c. constant growth of the money supply. d. increase the growth of the money supply.

d

The central bank is said to monetize the deficit when it a. prints Federal Reserve notes to satisfy the increased demand for money. b. sells government bonds from its own portfolio of government securities. c. requires member banks to buy the bonds to finance the deficit. d. purchases the bonds that the government issues.

d

The main goal of fiscal policy should always be to a. generate a budget deficit. b. balance the budget. c. balance C + I with government spending. d. balance aggregate demand with aggregate supply.

d

The main reason that the deficit grows in a recession is that a. the government reacts quickly and adjusts taxes to compensate. b. monetary policy that targets interest rates causes the costs of borrowing to fall. c. the deficit causes the recession, and reducing the deficit cures the recession. d. many forms of taxes act as automatic stabilizers.

d

The primary conclusion of using inflation accounting is that inflation a. distorts the tax system, and results in slower economic growth. b. reduces the national debt to its nominal value instead of its real value. c. causes recessions, and increases the structural deficit. d. distorts government budget accounting by exaggerating interest expense.

d

What happens typically to a budget deficit during a recession? a. It increases because of tax changes. b. It decreases because of spending decreases. c. It decreases automatically. d. It increases automatically.

d

When will the difference between the actual deficit and the structural deficit be the largest? a. in an inflationary gap b. at full employment c. at potential real GDP d. in a recession

d

Why does the government not have to repay debt, as do private individuals? a. Because the government can ignore creditors and refuse payment. b. Because the government, as a dictatorship, is unresponsive to demands for repayment. c. Because the government has no debt, it owes it to itself. d. Because the government does not have a finite life, as do individuals.

d

Argentina in 2001 faced a debt problem more serious than the U.S. debt problem because Argentina was obligated to repay its debt in a. U.S. dollars. b. their own currencies. c. a relatively short period of time. d. large installments.

a

How sensitive is the structural deficit to the state of the economy? a. It is insensitive to the state of the economy. b. The structural deficit changes cyclically with the economy. c. Changes in the structural deficit trigger opposite swings in the economy. d. The structural deficit changes countercyclically with the economy.

a

If the national debt is owed to foreigners, a. the debt constitutes a burden to domestic citizens. b. economic growth will necessarily be higher than if the debt were owed to domestic citizens. c. paying off the debt will involve a transfer of resources within the country. d. future interest payments on the debt are not a burden to the nation.

a

In Figure 16-1, there are four levels of income. G is government expenditures and TT is taxes less transfers. At which level of income does the official budget produce a surplus? a. Y4 b. Y3 c. Y2 d. Y1

a

One measure of "ability to pay," the national debt is the debt to a. GDP ratio. b. tax ratio. c. spending ratio. d. investment ratio.

a

Suppose that Figure 16-2 shows the effects of reducing the budget deficit by raising taxes. If authorities do not want real GDP to fall, monetary policy must a. become sufficiently more expansionary to restore the aggregate demand curve to D0D0. b. contract aggregate demand to be consistent with deficit-reducing fiscal policy. c. not lower interest rates and thwart the goal of a balanced budget. d. become more contractionary to lower the interest rate and spur investment.

a

The U.S. national debt at the end of fiscal year 2010 was almost a. $13.5 trillion. b. $9.0 trillion. c. $3.5 trillion. d. $1.3 trillion.

a

The national debt is the a. result of previous budget deficits. b. result of rising interest rates. c. result of previous budget surpluses. d. result of efficient balancing.

a

The structural deficit/surplus budget a. measures the federal budget deficit/surplus as if the economy were at full employment. b. measures the federal budget deficit/surplus as if the economy were in recession. c. measures the federal budget deficit/surplus as if the economy were suffering from high inflation. d. is used when structural unemployment is at a peak.

a

Until about 1983, almost all of the U.S. national debt stemmed from a. financing wars. b. bank failures. c. development assistance programs. d. tax cuts.

a

Which of the following individuals would be most likely to support a balanced budget amendment to the constitution? a. "Christmas is when children ask Santa Claus for things and their parents pay for them. Deficits is when adults ask government for things and their children pay for them."-Richard Lamm b. "In a boom, inflation can be caused by allowing unlimited credit to support excited enthusiasm of business speculators. But in a slump government expenditure is the only sure means of obtaining quickly a rising output."-J.M. Keynes c. "If we face a recession we should not lay off employees. Employees are not guilty; why should they suffer?"-Akio Morita d. "Underbalancing the budget during a depression is not primarily a deliberate policy but a practical necessity."-Gunnar Myrdal

a

Which of the following is expected to increase aggregate demand in the short run? a. Deficit budget b. Surplus budget c. Zero based budget d. Balanced budget

a

Because the personal income tax is an automatic stabilizer, a. inflationary gaps are impossible. b. the budget deficit grows during a recession. c. the deficit needed to cure a recessionary gap increases. d. the structural deficit grows during a recession. e. All of the above are correct.

b

Conventional budget accounting practices tend to overstate deficits in inflationary periods because they a. ignore the inflation tax. b. confuse repayment of principal with real interest expenditures. c. double count some expenditures. d. understate real interest rates.

b

For which of the following time periods did the U.S. have a budget surplus? a. 1990-1993 b. 1998-2001 c. 2003-2006 d. The U.S. did not have a surplus in any of these time periods.

b

If in fiscal year 2010, the federal government receives $2.2 trillion in revenues and spends $3.5 trillion for goods and services, the national debt will a. increase by $2.2 trillion. b. increase by $1.3 trillion. c. decrease by $1.3 trillion. d. decrease by $2.2 trillion.

b

If the economy is in a recessionary gap, and the government attempts to balance the budget, the effect will be to a. counteract the recession. b. worsen and prolong the recession. c. end the recession sooner. d. increase the level of real GDP.

b

If the national debt is owed entirely to U.S. citizens, a. paying off the debt will necessarily stimulate growth. b. future interest payments on the debt are not a burden to the nation as a whole. c. future economic growth will necessarily be slowed. d. the debt constitutes a burden to these citizens.

b

In 2010, which of the following was true regarding the extremely large deficits that the U.S. recently encountered? a. Most politicians and economists argued that the deficit had to be reduced. b. Most politicians argued that the deficit had to be reduced but economists cautioned against this course of action. c. Most economists argued that the deficit had to be reduced but politicians cautioned against this course of action. d. Both politicians and economist cautioned against deficit reduction.

b

In the early 1990s, economists became alarmed over the national debt because it a. was larger than three months' GDP. b. was growing faster than GDP. c. had reached twice the size of GDP. d. was growing faster than private debt.

b

Inflation accounting for the debt argues the following: a. The change in the value of the debt when inflation occurs complicates income tax codes, and is the reason for the tax changes of 2003. b. The portion of interest payments that compensate lenders for inflation should be considered repayment of debt rather than interest expense. c. The debt represents an inflationary problem, and grows more rapidly when people fear inflation. d. The portion of the deficit dedicated to repayment of interest on the debt should not be considered part of the deficit, because it is a transfer.

b

Lately, the ratio of debt to GDP has been a. rising at a small rate. b. rising steadily. c. falling modestly. d. staying constant.

b

Most economists agree that the focus of fiscal policy is to a. plan the economy. b. balance aggregate demand and aggregate supply. c. balance the federal budget. d. balance environmental needs and resources.

b

National debt is likely to fall when a. there is a succession of budget deficits. b. government's expenditure falls short of its receipts. c. government's expenditures exceed its receipts. d. government expenditure equals revenue.

b