Macroeconomics: Unit 4 -Module 9:

Macroland's internal debt is __________.

$10.5 billion - Macroland's internal debt is $10.5 billion, which is calculated as 0.7($15 billion).

True or False Actual deficit reduction may be larger than planned because the economy may suffer from slow growth and high unemployment.

False - Cutting the deficit is a form of contractionary fiscal policy. Out of a lower level of output, tax revenues will fall and transfer payments will rise as the automatic stabilizers kick in.

True or False If actual output is equal to potential output, the cyclical deficit is larger than the structural deficit.

False - If actual output is equal to potential output, the cyclical deficit is zero.

True or False If a deficit exists, the government must be pursuing an expansionary fiscal policy.

False - The deficit may simply be the result of automatic stabilizers and recessionary conditions.

True or False The national debt is the amount by which the federal government's expenditures exceed its revenues in a given year.

False Correct! The national debt is the cumulative total of all past budget deficits minus all past surpluses. It is the amount owed to lenders by the federal government.

When the economy is in a recession, what will running a budget deficit do?

Help end the recession by increasing spending - Help end the recession by increasing spending

The Federal Reserve is able to monetize debt by creating new money. What is the result if the Federal Reserve creates too much money?

Inflation - If too much new money is created, the value of the currency decreases and leads to inflation.

What is true about the federal government?

It is less likely to declare bankruptcy than a city government, since it has a broader tax base - The federal government has the power to tax over 300 million people and has access to other revenue sources as well.

Question Macroland's inflation rate increases to 10%. What effect will this have on its debt?

Its real debt will decrease. - Inflation decreases the value of money, so the real value of the debt will decrease.

Macroland pays a 10% interest rate on its debt. What are the present day effects of its debt?

Since 70% is external, the interest payments are high and leave the country.

If the government borrows money to expand the productive capacity of the economy and puts idle resources to work, then future generations will inherit a larger capital stock and enjoy a higher output.

The government increases spending by borrowing. - Production capacity is expanded by increasing the use of resources. - A larger capital stock will produce a higher output.

What happens when the Federal Reserve buys government bonds?

The money supply increases - The Federal Reserve is able to create new money to pay for bonds, and purchasing bonds puts new money into circulation, so the money supply increases.

If the US government runs a budget deficit, interest rates could increase. What impact would this have on the trade deficit?

The trade deficit would increase - At higher interest rates, the value of a dollar increases so the US would import more and export less, increasing the trade deficit.

True or False As a percentage of GDP, the U.S. national debt has been increasing for the past several decades.

True -

True or False. Debt owned by noncitizens or other countries is called external debt.

True - Debt owned by foreigners or other countries is external debt.

True or False An annually balanced budget would force Congress to collect taxes to pay for spending programs and, thus, restrict the growth of government.

True - During the recession phase, when tax revenue automatically falls and transfer programs are more expensive, there is a deficit, which would have to be reduced through higher taxes or lower spending under an annually balanced budget rule.

True or False When budget deficits are not controlled, there is no constraint on the size of the public sector.

True - It is much easier for everyone to support government spending when they do not have to face the burden of higher taxes.

True or False The actual deficit is not known until after the fiscal year is over.

True - One of the problems with taming the deficit is that its size is difficult to predict and control.

True or False When the Federal Reserve buys federal debt, it is monetizing the deb

True - The Federal Reserve is able to pay for government bonds using newly created money, which increases the money supply.

If the federal government's expenditures equal its revenues in a given year, the budget is __________.

balanced - The budget is balanced when the federal government's expenditures equal its revenues in a given year.

The effects of national debt depend on __________.

how large the debt is relative to the size of the economy, who owns the debt, and what the debt was spent on - The effects of national debt depend on three factors: how large the debt is relative to the size of the economy, who owns the debt, and what the debt was spent on.

What actions are necessary for a cyclically balanced budget?

surpluses during the expansion phase of the business cycle offset deficits incurred in the recession phase - The surpluses and deficits occur automatically and cancel each other out over the course of the business cycle.

The national debt is __________.

the sum of past deficits - The national debt is what a country owes for over-spending in the past.

Cyclical deficits exist __________.

when the economy is in a downturn of the business cycle (recession) - During a recession, government revenues will decrease and government spending (through automatic stabilizers and expansionary fiscal policy) will increase, creating a cyclical deficit.

Currently, Macroland has a deficit of$750,000,000and a national debt of $15 billion. (Please refer to the explanation of Macroland at the top of the page.)

Correct! The deficit is $750,000,000, which is $2.5 billion minus $1.75 billion. - Correct! The debt is $15 billion, which is 20($750,000,000).

The national debt is a stock concept, whereas the annual budget deficit is a flow concept.

Correct! The national debt is the total amount owed at a particular time. - Correct! The annual budget deficit is the amount added to the national debt each year.

Macroland's government is considering paying down its debt. It would like to decrease the debt to $11 billion from $15 billion, but Macroland's government is worried the decrease will do what to the economy?

The decrease will slow it down, which will cause the economy to go into a recession since government spending has been decreased and taxes have increased.

Which of the following is not included when public debt is reported?

The government debt held in the Social Security Trust Fund - Debt owned by nongovernment groups (the public) is called public debt.

Public debt is __________.

debt owned by people, groups, nongovernment entities, or owned by other countries - This type of debt is what determines the debt to GDP ratio that is heard on the news.

True or False When the economy goes into recession, the appropriate fiscal policy proposed by Keynesian economists is decreasing government spending or raising taxes.

False - Expansionary fiscal policy, in which a government increases its spending or lowers taxes, may recover an economy from a recession.

Why is comparing the size of the debt to the size of the economy by using the percentage of GDP more meaningful than just looking at the absolute value of the debt?

The capacity to repay the debt grows as the economy grows Incomes are rising when the economy is growing, so anticipated tax revenues are up. Similarly, a household can afford to take on more debt when income is higher.

What is a form of cutting the government's budget deficit?

Contractionary fiscal policy - Contractionary fiscal policy involves reducing government spending and/or raising taxes, both of which lead to a leftward shift of aggregate demand.

Which fiscal policy is likely to reduce the government's budget deficit?

Contractionary fiscal policy - Contractionary fiscal policy involves reducing government spending and/or raising taxes, both of which lead to a leftward shift of aggregate demand.

How does deficit spending hurt current citizens when they do not have to pay more in taxes for increased government spending?

Resources used for government programs cannot be used for private goods. - The opportunity cost of more government goods is less consumer goods.

In order to eliminate a budget deficit, the government must decrease spending and/or increase taxes. However, it is politically very difficult to do either of these during the expansionary phase of the business cycle.

Spending less will reduce the size of the deficit. - Bringing in more tax revenue will reduce the size of the deficit.

The U.S. government must pay interest on the outstanding debt. Which group is ultimately responsible for paying this expense?

The U.S. taxpayers are responsible for paying this expense. - The debt imposes a net interest burden on the U.S. government and, by extension, the U.S. taxpayers.

The structural deficit is the part of a deficit that would persist even if the economy were at the full-employment level. The cyclical deficit is that part of a deficit that is due to a downturn in economic activity.

A structural deficit of zero would reflect the goal of policy makers in the 1960s and 1970s, and suggest that fiscal policy is neutral. A deficit greater than zero would imply the direction of fiscal policy is expansionary, while a deficit less than zero would imply that fiscal policy is contractionary. - When the economy is in a downturn, automatic fiscal policy creates a deficit. Since this deficit is the result of business cycle activity, it is called a cyclical deficit.

One of the main benefits of active fiscal policy is increased employment . The main cost of active fiscal policy is a budget deficit .

Active fiscal policy means raising government spending and/or lowering taxes to combat recession. If successful, this policy increases output and employment. - The negative effect of using active fiscal policy to combat recession is a budget deficit. Since it is politically difficult to cut spending or raise taxes, there is a bias in favor of deficits.

An increase in the budget deficit is expected to increase interest rates, so funds will be attracted from abroad. The inflow of funds will cause the demand for U.S. dollars increase , driving the price of the dollar in terms of foreign currency higher . A high price for the dollar makes exports more expensive and imports Cheaper, resulting in a trade deficit , assuming imports and exports were balanced from the start.

An increase in the budget deficit means government's demand for loans increases, causing the equilibrium interest rate to rise. -

Economists have studied the effects of a large Hint, displayed below debt on the growth rate of an economy and they have found that when the ratio is overHint, displayed below 90% , there is approximately a 1 percent decrease in the growth rate. While this does not sound large, small differences in growth rates over time lead to large differences in GDP due to percentages Hint, displayed below compounding .

Economists studied the effects of a large debt on the growth rate of the economy. A debt to GDP ratio over 90% slows economic growth by 1%. Compounding percentages year by year amplifies the effects of the rate. The deficit is a negative balance at the end of the fiscal year. The debt to GDP ratio needs to be significant to slow growth rate. If we compound 1%, it will increase through the years.

Keynesian economics recommends the use of active fiscal policy. Specifically, policymakers should increase spending to reduce unemployment . Assuming that the government starts in neither a surplus nor deficit, active fiscal policy results in budget deficit when used to combat recession and in budget surplus when used to reduce aggregate expenditure.

Firms are more likely to hire workers when spending is strong, motivating them to increase output. - Recession-fighting policy includes increased government spending and/or reduced taxes. - Inflation-fighting policy includes reduced government spending and/or increased taxes, which results in budget surpluses.

What happens when indirect crowding out occurs?

Government competes for funds in the credit market, causing interest rates to rise for all borrowers - Private sector borrowers, such as a corporation seeking to finance a new factory, are less able to borrow when government borrows available funds and causes higher interest rates.

If the economy is at full employment and the budget is balanced, what impact will automatic stabilizers have on the budget?

It will be in deficit when the economy is in recession and in surplus when the economy is booming - Government will automatically take in less tax revenue when recessions lower income and more tax revenue during upturns. Likewise, transfer programs like unemployment compensation are more expensive during recession.

What would happen to Macroland's deficit if it entered a recession?

It would increase because revenue decreases and spending increases as automatic stabilizers increase. - As people lose their jobs in a recession, the government collects less revenue while, at the same time, paying out more in unemployment benefits and increasing government spending to stimulate the economy, according to Keynesian theory.

What is a successful deficit reduction is likely to result in?

Lower interest rates on future national debt - Lower national debt decreases the likelihood that the nation will default on its debt, so this decreases the price paid (the interest rate) for borrowing.

Macroland has a structural deficit.

Macroland has been running a deficit for 20 years and is currently at the full-employment level of output.

Which is an example of an unfunded liability of the U.S. federal government?

Medicare payments for those who are retiring this year - Government has been using past contributions to Medicare to fund medical expenses for past retirees. The medical expenses of those who are retiring now must be funded out of money that has not yet been collected.

True or False As a result of the Great Depression and World War II, the national debt increased significantly.

True - The Great Depression caused a sharp drop in output, leading to lower tax revenues and an increase in government borrowing. World War II brought a large increase in output, but an even larger increase in government borrowing.

True or False Reducing the deficit requires raising taxes and lowering government spending and both of these have political difficulties.

True - The deficit can only be reduced if the government raises taxes, cuts spending, or some of each.

True or False The U.S. government must pay an annual interest payment on its outstanding debt.

True - The interest payment is about 10 percent to 12 percent of the federal budget.

True or False If the government must cut spending on welfare programs in order to repay the national debt, the people who would benefit from those spending programs will essentially be "taxed" to pay back the debt.

True - The people benefiting from welfare spending programs receive less aid when those programs are cut. This could be considered a tax on their income.

True or False If output falls far below full employment, progressive income taxes and transfer programs will create a deficit as tax revenues fall and transfer payments rise. But these changes will help increase spending and output.

True - These automatic stabilizers help to smooth out the ups and downs of the business cycle.

True or False The two government groups that own federal debt are the Social Security Trust Fund and the Federal Reserve.

True - While the Social Security Trust fund owns the majority of the non-public debt, the Federal Reserve owns some of the debt.

True or False During the Great Depression, there was support for spending more on social projects during economic downturns and cutting back when the economy returned to full employment.

True- Economic downturns are often the result of weak spending, so spending more on social projects is a way to prevent a downturn from becoming more severe.

What event in the 1940s caused a substantial increase in national debt?

War - WWII required large amounts of money and capital. The government borrowed money from citizens who, in turn, had less money to spend on goods and services. These resources were used by the government to create military supplies instead.

When can running a deficit cause a problem for future generations?

When resources may be diverted away from productive investmen - If the government increases spending when the economy is at full employment, resources may be diverted away from productive investment.

If most government bondholders are rich, reducing spending on government welfare programs to repay the debt would redistribute income from the poor to the rich .

When the government repays its debt, it must raise taxes or cut spending, which changes the amount of a household's income. - Taxes or spending cuts will lower poor household's income, while repayment will add to the bondholders, who are mostly rich.

Fiscal policy is beneficial for the future generations of a country (despite the debt that it may cause) if it __________.

expands the productive capacity of the economy and puts idle resources to work - Increasing AD through fiscal policy is beneficial for the future generation of a country if it expands the productive capacity of the economy and puts idle resources to work. This provides a higher output and economic growth for future generations and allows them the ability to pay back the national debt.