Deck 23: Fiscal Policy: a Summing up

Question 1

A higher deficit in the current year will lead to increased debt in the future only if:

A) the deficit is greater than the previous year's deficit.
B) future primary surpluses are less than the interest payment.
C) it causes an increase in private saving.
D) the deficit- to- GDP ratio is greater than the debt- to- GDP ratio.
E) it causes a fall in private saving.

Answer 1

future primary surpluses are less than the interest payment.

Question 2

In the hyperinflations between World War I and World War II, nominal money growth rates were:

A) about equal to the ratio of the budget deficit to GDP.
B) about right to maximise the amount of seignorage.
C) larger than needed to maximise seignorage.
D) larger than needed to finance the budget deficit.
E) surprisingly low.

Answer 2

larger than needed to maximise seignorage.

Question 3

In the medium run, a fiscal expansion that causes an increase in the budget deficit will affect which of the following?

A) Only the composition of output.
B) The level of output but not its composition.
C) The level of employment but not its composition.
D) Both the level and composition of output.
E) Both the level and composition of employment.

Answer 3

Only the composition of output.

Question 4

The debt- to- GDP ratio is higher:

A) the higher the ratio of the primary surplus to GDP.
B) the lower the real interest rate.
C) the higher the real interest rate.
D) the higher the growth rate of output.
E) the lower the ratio of the primary deficit to GDP.

Question 5

In virtually all hyperinflations, rapid money growth begins to occur because of:

A) credit dominance.
B) monetary dominance.
C) exchange dominance.
D) income dominance.
E) fiscal dominance.

Question 6

When the budget deficit is financed entirely through money creation, the real budget deficit is equal to which of the following?

A) OH.
B) P(OH/H).
C) OH/OP.
D) OH/P.
E) OH/H.

Question 7

A rule of thumb for Australia is that a 1% increase in output leads automatically to a decrease in the deficit of what percentage of GDP?

A) 4.3%.
B) 2.3%.
C) 1.3%.
D) 0.3%.
E) 3.3%.

Question 8

In the short run, a fiscal contraction that causes a decrease in the budget deficit:

A) affects the level of output but not its composition.
B) affects both the level and composition of output.
C) affects only the price level.
D) is neutral.
E) affects only the composition of output.

Question 9

Which of the following is an entitlement program?

A) Medicare.
B) Age pension.
C) Social Security.
D) All of the above.
E) None of the above.

Question 10

In the medium run, a fiscal contraction that causes a decrease in the budget deficit:

A) affects the level of output but not its composition.
B) affects both the level and composition of output.
C) will not affect the composition of output but will affect the price level.
D) is neutral.
E) affects only the composition of output.

Question 11

Assume that real money balances do not change. Which of the following will occur if the central bank increases money growth?

A) Seignorage will decrease.
B) Seignorage will increase.
C) There will be no change in seignorage.
D) There will be an ambiguous effect on seignorage.
E) Seignorage will initially decrease followed by increases.

Question 12

A decrease in money growth, holding all other factors constant, will cause:

A) A decrease in seignorage.
B) An increase in seignorage.
C) No change in seignorage.
D) An ambiguous effect on seignorage.
E) Increases followed by decreases in seignorage.

Question 13

Which of the following will cause a decrease in the debt- to- GDP ratio?

A) An increase in the real interest rate.
B) An increase in the ratio of the primary deficit to GDP.
C) An increase in investment.
D) An increase in consumption.
E) An increase in the growth rate of output.

Question 14

If the Ricardian equivalence proposition is correct, then an increase in the budget deficit will lead to:

A) a decrease in investment spending.
B) a lower standard of living in the future.
C) a decrease in private saving.
D) an increase in investment spending.
E) an increase in private saving.

Question 15

Very high debt burdens can result in:

A) debt restructuring.
B) fine tuning.
C) the structural deficit.
D) tax smoothing.
E) automatic stabiliser.

Question 16

Using taxes to finance a war, rather than deficits:

A) shares less of the burden of the war with future generations.
B) leads to relatively large decreases in investment.
C) leads to a larger future capital stock.
D) Both A and B.
E) Both A and C.

Question 17

The official measure of the deficit is represented by which of the following expressions?

A) iB + G - T.
B) rB - G + T.
C) iB + T - G.
D) (i - n)B + G - T.
E) uB + G - T.

Question 18

During most episodes of hyperinflation:

A) the inflation rate first increases, and then remains constant.
B) the inflation rate increases over time, but then rapidly decreases on its own.
C) the inflation rate decreases over time.
D) the inflation rate is high but constant.
E) the inflation rate increases over time.

Question 19

The Australian official and inflation- adjusted fiscal balance measures since 1990 have been close because:

A) inflation and net government debt have been high.
B) nominal interest rates and net government debt have been low.
C) inflation and net government debt have been low.
D) inflation and real interest rates have been high.
E) inflation and real interest rates have been low.

Question 20

The United States financed the additional government spending during World War II through:

A) increases in both the deficit and imports.
B) an increase in the deficit.
C) an increase in taxes.
D) an increase in imports.
E) increases in both the deficit and taxes.

Question 21

The difference between the official and correct measures of the deficit will be greater:

A) the higher is the level of debt.
B) the lower is taxes.
C) the lower is the level of debt.
D) the lower is inflation.
E) the lower is government spending.

Question 22

The official measure of the deficit becomes more inaccurate as:

A) the total debt falls.
B) investment rises.
C) taxes rise.
D) government spending rises.
E) the inflation rate rises.

Question 23

Seignorage is defined as which of the following?

A) The increase in income tax revenues that occurs during a hyperinflation.
B) The part of a budget deficit financed by the issuance of bonds sold to the private sector.
C) The part of a budget deficit financed with foreign lending.
D) Revenue from money creation.
E) The increase in income tax revenues that occurs as a result of nominal income tax brackets not being adjusted to changes during a hyperinflation.

Question 24

Which of the following is common to all hyperinflations?

A) High trade deficits.
B) High budget deficits.
C) Liquidity traps.
D) Credible monetary policy.
E) Disinflation.

Question 25

All else equal, a rise in the debt- to- GDP ratio implies:

A) a greater surplus is needed to prevent further rises in the debt- to- GDP ratio.
B) a greater difference between the official and correct measures of the deficit as a fraction of GDP.
C) a greater ratio of interest payments to GDP.
D) All of the above.
E) None of the above.

Question 26

In virtually all hyperinflations, rapid money growth begins to occur because of:

A) large and/or growing budget deficits.
B) union demands for higher wages.
C) a war.
D) the introduction of wage indexation in labour contracts.
E) a change of government.

Question 27

To reduce distortions in the economy, it is probably better to finance temporary large government spending with:

A) taxes.
B) capital inflows.
C) exports.
D) national asset sales.
E) deficits.

Question 28

The effect of changes in economic activity on the budget deficit is called:

A) automatic stabiliser.
B) debt monetisation.
C) tax smoothing.
D) fine tuning.
E) the structural deficit.

Question 29

Debt monetisation occurs when:

A) a higher deficit is eliminated with higher tax revenues.
B) a government begins borrowing from foreigners.
C) a budget deficit is financed with money creation.
D) a country experiencing hyperinflation negotiates a reduction in its foreign debt.
E) banks are asked to continue lending during a hyperinflation.

Question 30

If the government runs a primary deficit in year zero of B0, and, in year 1, decides to stabilise the debt (i.e., prevent the deficit from rising any further), then in year 1 and beyond, it must run a primary surplus equal to:

A) B0.
B) zero.
C) rB0.
D) B0(1 + r).
E) B0(1 + r)t.

Question 31

Given nominal money growth, the amount of seignorage will be greater when:

A) foreign lending is higher.
B) the inflation rate is higher.
C) real money balances are larger.
D) interest rates are higher.
E) tax revenues are higher.

Question 32

The debt ratio will increase by more in any given year when:

A) the initial debt ratio is greater.
B) the growth rate of GDP is higher.
C) the real interest rate is lower.
D) the primary deficit ratio is lower.
E) the initial debt ratio is lower.

Question 33

The most extreme hyperinflation of the 20th century occurred in:

A) Asia.
B) Africa.
C) Europe.
D) Latin America.
E) North America.

Question 34

In the 20th century, the most extreme episodes of hyperinflation in Europe occurred between:

A) 1920 and 1946.
B) 1950 and 1970.
C) 1970 and 1983.
D) 1985 and 1994.
E) 1900 and 1920.

Question 35

If the government runs a primary deficit in year zero of B0, and decides to repay it in year t (i.e., bring the debt back down to its pre- existing level), then in year t it must run a primary surplus equal to:

A) B0(1 + r).
B) B0(1 + r)t.
C) one.
D) zero.
E) B0.

Question 36

The debt ratio is the ratio of the debt to:

A) government spending.
B) income.
C) GDP.
D) taxes.
E) saving.

Question 37

What is a haircut?

A) The private sector agrees to a discount on the debt they are owed.
B) Borrowers agree to a discount on the debt they are owed.
C) Central banks agree to a discount on the debt they are owed.
D) Lenders agree to a discount on the debt they are owed.
E) Governments agree to a discount on the debt they are owed.

Question 38

If the Ricardian equivalence proposition is correct, then:

A) deficits stimulate the economy in the short run.
B) deficits stimulate the economy in the medium run.
C) deficits have no effects on economic activity.
D) deficits harm future generations.
E) deficits reduce investment spending.

Question 39

In the short run, a fiscal expansion that causes an increase in the budget deficit:

A) affects the level of output but not its composition.
B) affects both the level and composition of output.
C) affects only the price level.
D) is neutral.
E) affects only the composition of output.

Question 40

Seignorage is equal to:

A) the percentage growth rate of nominal money.
B) one divided by the rate of inflation.
C) real money balances.
D) the percentage growth rate of nominal money times real money balances.
E) the rate of inflation.

Question 41

The government budget constraint tells us that the budget deficit is equal to:

A) the primary deficit plus interest on the debt.
B) interest on the debt.
C) imports minus exports.
D) the primary deficit.
E) the primary deficit plus the trade deficit plus interest on the debt.

Question 42

During the European hyperinflations, nominal money growth:

A) was moderate.
B) was less than interest rates.
C) was less than real money growth.
D) was less than inflation.
E) was very rapid.

Question 43

Which of the following would increase the cyclically adjusted deficit?

A) A decrease in income.
B) An increase in the primary surplus.
C) An increase in income.
D) A decrease in the primary deficit.
E) An increase in the primary deficit.

Question 44

The debt- to- GDP ratio will tend to decline over time when:

A) the primary deficit increases.
B) the initial level of debt increases.
C) the primary surplus decreases.
D) r < g.
E) r > g.

Question 45

Seignorage can be expressed as:

A) H/P.
B) OH.
C) OH/OP.
D) H/OP.
E) OH/P.

Question 46

The debt ratio for Australia from 1946 to 1963:

A) increased dramatically.
B) decreased dramatically.
C) remained constant.
D) decreased slightly.
E) increased.

Question 47

The official measure of the deficit:

A) depends on the nominal interest rate.
B) depends on the real interest rate.
C) always underestimates the correct measure of the deficit when inflation is positive.
D) differs from the correct measure by the inflation rate times taxes.
E) differs from the correct measure by the inflation rate times government spending.

Question 48

During the 1900s, which of the following countries experienced the largest increase in the aggregate price level?

A) Germany.
B) Hungary.
C) France.
D) Austria.
E) Poland.

Question 49

In the long run, a decrease in the budget deficit (caused by, for example, a decrease in government spending) will:

A) only affect the price level and the composition of output.
B) not affect the level of output, but does affect the composition of output.
C) only affect the price level.
D) cause an increase in the level of output.
E) cause a decrease in the level of output.

Question 50

In the long run, an increase in the budget deficit (caused by, for example, an increase in government spending) will:

A) cause a decrease in the level of output.
B) only affect the price level and the composition of output.
C) only affect the price level.
D) not affect the level of output, but does affect the composition of output.
E) cause an increase in the level of output.

Question 51

The correct measure of the deficit is represented by which of the following expressions?

A) uB + G - T.
B) rB - G + T.
C) iB - G - T.
D) (i - u)B + G - T.
E) iB + T - G.

Question 52

The correct measure of the deficit is also called:

A) the full- employment deficit.
B) the inflation- adjusted deficit.
C) the cyclically- adjusted deficit.
D) the natural deficit.
E) the structural deficit.

Question 53

The "official measure" of the deficit (the one reported by the government):

A) overestimates the real budget deficit whenever the inflation rate is positive.
B) tells us the change in government nominal debt.
C) is equal to nominal interest payments on the debt plus the primary deficit.
D) All of the above.
E) None of the above.

Question 54

Hyperinflation typically leads to:

A) a preference for domestic over foreign currency.
B) a decrease in real money balances.
C) a decrease in barter.
D) a more efficient transactions system.
E) an increase in real tax revenues collected by the government.

Question 55

The Ricardian Equivalence proposition suggests that a tax increase that causes a budget surplus will:

A) decrease in investment.
B) increase in investment.
C) cause a reduction in output.
D) cause an increase in output.
E) cause no change in output.

Question 56

The deficit (as a fraction of GDP) is anticipated to rise over the next several decades due to projections of:

A) decreased income tax revenues.
B) increased spending on entitlements.
C) decreased corporate tax revenues.
D) increased defence spending.
E) increased inflation.

Question 57

The primary deficit is:

A) interest on the debt minus net tax revenues.
B) government deficit minus net tax revenues.
C) government deficit plus interest on the debt minus net tax revenues.
D) government deficit plus net tax revenues minus interest on the debt.
E) government deficit minus interest on the debt.

Question 58

The difference between the official and correct measures of the deficit will be greater:

A) the lower is output growth.
B) the lower is inflation.
C) the higher is inflation.
D) the higher is output growth.
E) the lower is the level of debt.

Question 59

A signal that a hyperinflation is imminent is when government finances a growing proportion of its budget deficit through:

A) bonds sold to foreigners.
B) voluntary contributions.
C) tax collections.
D) bonds sold to domestic citizens.
E) monetisation.

Question 60

The primary deficit is represented by which of the following?

A) iB + G - T.
B) rB + G - T.
C) rB - G + T.
D) G - T.
E) iB - G + T.

Question 61

What are the factors that will determine the size of some future required tax increase to pay off all debt?

Question 62

If the government thinks the natural unemployment rate is 7%, when it is really 6%, then the government will:

A) underestimate the actual deficit.
B) overestimate the cyclically adjusted deficit.
C) overestimate the actual deficit.
D) underestimate the cyclically adjusted deficit.
E) underestimate the primary deficit.

Question 63

An increase in money growth leads, ultimately, to:

A) a rise in the inflation rate.
B) a decline in real money balances.
C) a rise in the nominal interest rate.
D) All of the above.
E) None of the above.

Question 64

Explain how a country with high debt ratio may find the situation deteriorates into a dynamic of debt explosion? What is the policy lesson?

Question 65

First, explain what seignorage is. Second, write out and explain the expression that represents seignorage. And finally, what policies can a central bank implement to increase seignorage?

Question 66

What is debt restructuring?

A) A central bank that will no longer monetise the debt.
B) A government that partially defaults on its debt obligations.
C) A government that will no longer run real deficits.
D) A government that will no longer run nominal deficits.
E) A government that will no longer borrow from foreigners.

Question 67

First, define and explain the cyclically adjusted deficit. Second, explain what effect a recession caused, for example, by a decrease in consumer confidence will have on the size of the cyclically adjusted deficit.

Question 68

Explain what is meant by debt monetisation. Include in your answer a graph of the IS- LM model to help explain your answer.

Question 69

Explain what is meant by automatic stabilisers and how they work to minimise fluctuations in economic activity.

Question 70

Explain what can occur to cause an increase in the debt ratio.

Question 71

The Ricardian equivalence proposition states that an increase in the budget deficit causes:

A) consumption to increase.
B) consumption to decrease.
C) private saving to decrease.
D) output to increase.
E) private saving to increase.

Question 72

Under what conditions will the official measure of the budget deficit be greater than, less than, or equal to the correct measure of the budget deficit.

Question 73

What are the primary causes of hyperinflations? Explain.

Question 74

For this question, assume that the Ricardian Equivalence proposition does not hold. Briefly discuss the short- run, medium- run and long- run effects of a fiscal expansion (e.g. tax cut).

Question 75

Explain the macroeconomic effects of a tax cut according to the Ricardian Equivalence proposition. Include in your answer the IS- LM graph that shows the effects of this tax cut.

Question 76

Suppose the Ricardian Equivalence proposition holds (i.e., it is correct). What does this imply about the ability of fiscal policy to affect GDP? Explain.

Question 77

Suppose the central bank increases the rate of growth of the money supply. What effect will this increase in money growth have on seignorage in: (1) the short run; and (2) the medium run? Explain.