Deck 20: Deficit Finance

Question 1

When a model takes into account the fact that several different generations may coexist simultaneously,this is known as a(n)

A)neoclassical model.
B)life-cycle model.
C)overlapping generation model.
D)crowding?out model.

Answer 1

overlapping generation model.

Question 2

Which one of the following statements is true?

A)A budget surplus will reduce national saving.
B)A budget deficit decreases national saving.
C)A budget deficit will decrease interest rates.
D)A budget deficit increases national savings.

Answer 2

A budget deficit decreases national saving.

Question 3

Lerner's view on debt financing is

A)Future generations bear a burden of external debt.
B)Burden of debt can be transferred across generations.
C)Internal debt creates no burden for the future generations.
D)Government debt crowds-out the available funds for private sector.

Answer 3

Internal debt creates no burden for the future generations.

Question 4

The level of economic activity in a given year will cause the budget deficit to vary.

Question 5

During the period from 1999 - 2008,federal budget deficits

A)were never calculated.
B)fell dramatically.
C)increased as a percentage of GDP.
D)can be regarded as structural.

Question 6

The purpose of functional finance is to

A)decrease deficits through monetary policy.
B)use fiscal policy to keep aggregate demand at the desired level,regardless of the impact on deficits.
C)tax corporate income first at the corporate level,and then again when it is distributed to shareholders.
D)use monetary policy to keep deficits stable over time.

Question 7

Because of the differing account conventions,there is a great deal of arbitrariness in a number that purports to be

A)the deficit.
B)the surplus.
C)the debt.
D)all of the above.

Question 8

The portion of a government's indebtedness owed to foreigners is

A)external debt.
B)internal debt.
C)not recoverable.
D)net debt.

Question 9

Inflation

A)increases the real value of the debt.
B)has no impact on the debt.
C)decreases the real value of the debt.
D)is always factored into any calculations of deficits or surpluses.

Question 10

The burden of the debt can be viewed as

A)a moral question.
B)a political question.
C)a financial question.
D)all of the above.

Question 11

The burden of the debt does not depend on whether debt finance crowds out private investment.

Question 12

When the government borrows in the market,it

A)does not have to pay interest.
B)is not required to pay back the entire principle.
C)can get indefinite extensions on the loan.
D)does all of the above.
E)does none of the above.

Question 13

High real interest rates

A)increase the demand for the domestic currency by foreigners.
B)cause decreased job opportunity.
C)cause worker productivity to decrease.
D)crowd out interest-sensitive expenditures.

Question 14

According to the Ricardian view of government deficits,

A)any future burden of tax financing should be ignored.
B)government deficits reduce interest rates.
C)taxpayers are less capable of saving when debt finance is used rather than tax finance.
D)the private sector supply of loanable funds will increase in the face of government deficits.

Question 15

At a given point in time,if all past deficits and surpluses were added,we would get the

A)Ricardian model.
B)debt.
C)crowding?out model.
D)total amount of excess burden.

Question 16

The United States has not had a surplus in the last 30 years.

Question 17

When government borrowing decreases private investment by raising the market interest rate,this is known as

A)the Director's Law.
B)crowding out.
C)positive economics.
D)the Ramsey Rule.

Question 18

According to a model of intergenerational equity,if future generations are expected to be better off than the current generation,transfers should

A)go from the richer generation to the poorer generation.
B)not be done at all.
C)go from the poorer generation to the richer generation.
D)be weighted by increases in the inflation rate.

Question 19

In 2008,the amount of the debt held by the public as a percent of GDP was

A)33.3.
B)59.3.
C)41.0.
D)20.3.

Question 20

Before World War II,the United States did not use deficit financing and paid for all goods and services with cash.

Question 21

High interest rates contribute to a lower federal budget deficit.

Question 22

If raising taxes or borrowing are your only two choices of financing current expenditures,which would you choose,and why,if you were in charge of setting policy?

Question 23

We have learned from this chapter that the real value of the debt is eroded by inflation and may be overestimated because of it and other factors.Do you feel that the debt will be a major concern during your working lifetime and retirement?

Question 24

In the year 2008,nearly half of all privately held federal debt was held by foreign investors.

Question 25

Ricardian view on debt is that the form of government finance is irrelevant

Question 26

From an efficiency standpoint,one must compare the excess burdens of tax and debt finance.

Question 27

The deficits of the 1980s can be regarded as structural.

Question 28

You make a loan to the government of $100.The government promises to pay you back some sum of money in two years.The interest rate will be 4 percent over that period,but inflation will be 4 percent.How much will you require that the government pay you in two years in the absence of any inflation? With inflation?

Question 29

Suppose,in 2008,the federal debt was $5 trillion.That year,the United States ran a deficit of $455 billion.During the course of the year,the inflation rate was 3.8%.How much is the "inflation tax"?

Question 30

Refer to Figure 20.3 in your textbook.Suppose the equation that equates excess burden to the tax rate can be written as EB = t²,where EB is excess burden and t is the tax rate.
(A)Suppose the tax rate t is initially 12 percent.How much excess burden is generated?
(B)If the tax rate doubles to 24 percent,what happens to excess burden?

Question 31

Total Government Debt is the sum of previous surplus and deficits.

Question 32

If we assume that government borrowing crowds out private investment,then future generations will have a smaller capital stock.Ricardo's view is that this will not be the case,because people are forward looking.Do you agree?