Deck 16: Budget Deficits in the Short and Long Run

Question 1

The federal budget deficit in 2009 was more than eight times larger than the deficit in 2007.

Answer 1

True

Question 2

In 2010,many politicians argued that the deficit should be reduced at all costs but many economists countered that deficit reduction would be problematic given the state of the economy.

Answer 2

True

Question 3

Deficits are created by governments running a large debt.

Answer 3

False

Question 4

Both Social Security expenditures and the payroll tax receipts that finance them are treated as off-budget items.

Question 5

The actual deficit is a poor measure of the government fiscal policy because it changes independently of intentional government policies.

Question 6

As GDP falls,automatic stabilizers run the federal budget in a deficit direction.

Question 7

Like many families,the national debt in 2010 was many times larger than the national income.

Question 8

The structural deficit is determined by established expenditure-transfer policies and tax rates and is independent of the current level of GDP.

Question 9

The official fiscal year budget deficits disappeared from 1998 to 2001.

Question 10

Economic principles suggest that we should focus on balancing the budget rather than balancing aggregate supply and aggregate demand.

Question 11

The structural deficit can be used to estimate the thrust of current fiscal policy.

Question 12

The structural deficit is extremely sensitive to the performance of the economy.

Question 13

In 2010,the net national debt was about $9 trillion or approximately $29,000 per person.

Question 14

At levels of GDP above full employment,the federal budget would usually be in a deficit position.

Question 15

The budget deficit is the amount by which a government's expenditures exceed its receipts.

Question 16

Although a balanced budget may be appropriate under one monetary policy,a deficit or surplus may be appropriate under a different monetary policy.

Question 17

Because of the recessions in 1983 and 1991,the structural deficit was far larger than the actual deficit in those years.

Question 18

Expansionary fiscal policy normally lowers interest rates.

Question 19

In 2010 and 2011,President Obama advocated deficit reduction through decreased spending while Republicans in Congress advocated increased taxation to achieve the same goal.

Question 20

If a balanced budget were required in 2008,the government would have been required to cut spending and increase taxes.

Question 21

Since the debt is measured in dollars,the presence of inflation serves to understate the t level of indebtedness.

Question 22

In 2010,the debt-to-GDP ratio increased to roughly the same ratio as the 1990s.

Question 23

Analogies between public and private debt are usually misleading.

Question 24

Contractionary fiscal policies used to reduce the deficit in the 1990s did not hurt the economy because fiscal and monetary policies were well coordinated at that time.

Question 25

When budget deficits take place in a high-employment economy,the effect is an increase in capital stock.

Question 26

In 2009,the Social Security System ran a surplus of approximately $137 billion.

Question 27

It is most likely that the federal government will never actually pay off the national debt.

Question 28

Monetizing the debt is a way of turning debt into money and reducing the burden of the debt.

Question 29

A constitutional amendment requiring an annually balanced budget would help stabilize the economy.

Question 30

The portion of the national debt owned by foreigners does constitute a burden to the U.S.

Question 31

The "crowding out" effect states that government spending pushes up interest rates and reduces private investment spending.

Question 32

If the Federal Reserve takes no countervailing actions,an expansionary fiscal policy will increase the deficit,increase GDP,increase prices,and drive up interest rates.

Question 33

Until 1983,almost all U.S.national debt stemmed from financing wars or from the loss tax revenues that accompany recession.

Question 34

The share of the net national debt owned by foreign individuals,businesses,and governments increased to 80% in 2010.

Question 35

Deficit spending will not cause much inflation if the economy is operating near full employment.

Question 36

The short-run effects of government's financial rescue program and fiscal stimulus package helped the economy increase aggregate demand curing the Great Recession.

Question 37

The American national debt,like the Greek debt in 2010,is an obligation to pay primarily in foreign currencies.

Question 38

If deficit spending causes an increase in economic activity,it may "crowd in" some potential investment spending.

Question 39

Monetizing the deficit contributes to the inflationary pressures that are already present in the economy.

Question 40

When the economy has substantial additional saving,deficit spending will have a large "crowding out" effect.

Question 41

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

Question 42

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.

Question 43

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

Question 44

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.

Question 45

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.

Question 46

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.

Question 47

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.

Question 48

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

Question 49

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.

Question 50

In 2010,which of the following was t 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.

Question 51

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.

Question 52

In 2009,the U.S.had a budget deficit of approximately

A) $161 billion.
B) $459 billion.
C) $800 billion.
D) $1.4 trillion.

Question 53

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.

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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

Question 58

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.

Question 59

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.

Question 60

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.

Question 61

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.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

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.

Question 66

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.

Question 67

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.

Question 68

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.

Question 69

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.

Question 70

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.

Question 71

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.

Question 72

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.

Question 73

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.

Question 74

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.

Question 75

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.

Question 76

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.

Question 77

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.

Question 78

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.

Question 79

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.

Question 80

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.