Deck 23: Fiscal Policy: a Summing up

Question 1

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

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

Answer 1

D

Question 2

If the government runs a primary deficit in year zero of B0,and,in year 1,decides to stabilize 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)zero.
B)B0.
C) (1+r)B0.
D)r.
E)none of the above

Answer 2

D

Question 3

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)the deficit-to-GDP ratio is greater than the debt-to-GDP ratio.
C)it causes a drop in private saving.
D)it causes an increase in private saving.
E)none of the above

Answer 3

E

Question 4

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

A)consumption to decrease.
B)savings to decrease.
C)investment to decrease.
D)all of the above
E)none of the above

Question 5

If the Ricardian equivalence proposition is correct,then

A)deficits harm future generations.
B)deficits reduce investment spending.
C)deficits stimulate the economy in the short run.
D)all of the above
E)none of the above

Question 6

The official measure of the deficit becomes more inaccurate as

A)the inflation rate rises.
B)the total debt falls.
C)taxes rise.
D)all of the above
E)none of the above

Question 7

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

A)the real interest rate is lower.
B)the growth rate of GDP is higher.
C)the initial debt ratio is greater.
D)all of the above
E)none of the above

Question 8

If the government thinks the natural unemployment rate is 5%,when it is really 6%,then the government will

A)overestimate the actual deficit.
B)underestimate the actual deficit.
C)overestimate the cyclically adjusted deficit.
D)underestimate the cyclically adjusted deficit.
E)none of the above

Question 9

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

A)an increase in private saving.
B)a decrease in investment spending.
C)a lower standard of living in the future.
D)all of the above
E)none of the above

Question 10

Using taxes to finance a war,rather than deficits,

A)leads to a greater future capital stock.
B)is generally not proposed by economists.
C)shares less of the burden of the war with future generations.
D)all of the above
E)none of the above

Question 11

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)zero.
B)one.
C)B0.
D)B0(1+r).
E)none of the above

Question 12

The large increases in the deficit during the 1980s in the United States were associated with

A)large increases in public saving.
B)no change in public saving.
C)large increases in private saving.
D)all of the above
E)none of the above

Question 13

The official measure of the deficit

A)always underestimates the correct measure of the deficit when inflation is positive.
B)differs from the correct measure by the inflation rate times taxes.
C)depends on the nominal interest rate.
D)depends on the real interest rate.
E)none of the above

Question 14

Which of the following would increase the cyclically adjusted deficit?

A)an increase in income.
B)a decrease in income.
C)an increase in the primary deficit.
D)a decrease in the primary deficit.
E)none of the above

Question 15

The debt-ratio is the ratio of the debt to

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

Question 16

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

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

Question 17

The primary deficit is

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

Question 18

Since the early 1980s,debt ratios for the OECD countries have

A)increased.
B)remained constant.
C)decreased slightly.
D)decreased dramatically,and are now close to zero.
E)become impossible to define.

Question 19

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

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

Question 20

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

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

Question 21

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

A)0.5%
B)1%
C)1.5%
D)2%

Question 22

"Debt repudiation" occurs when

A)a government announces it will no longer run nominal deficits.
B)a government announces it will no longer run real deficits.
C)a government announces it will no longer honor its debt obligations.
D)a central bank will no longer monetize the debt.

Question 23

The correct measure of the deficit is also called

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

Question 24

The official measure of the deficit is equal to

A)iB + G - T.
B)iB + T - G.
C)rB - G + T.
D) (i - π)B + G - T.
E)none of the above

Question 25

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

A)iB - G + T.
B)iB + T - G.
C)rB - G + T.
D) (i - π)B + G - T.
E)none of the above

Question 26

Which of the following will cause a reduction 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 the growth rate of output.
D)all of the above

Question 27

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

A)the lower is inflation.
B)the lower is the level of debt,B.
C)the higher is growth of output.
D)all of the above
E)none of the above

Question 28

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

A)the level of output but not its composition
B)both the level and composition of output
C)only the composition of output
D)only the price level
E)none of the above

Question 29

The primary deficit is represented by which of the following?

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

Question 30

In the medium run,a tax increase that causes a reduction in the budget deficit will

A)affect only the price level.
B)not affect the price level but will alter the composition of output.
C)not affect the level of output,but will affect the composition of output.
D)affect both the level and composition of output.

Question 31

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

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

Question 32

The debt-to-GDP ratio is higher,

A)the lower the real interest rate.
B)the lower is the ratio of the primary deficit to GDP.
C)the higher is the growth rate of output.
D)all of the above
E)none of the above

Question 33

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

A)cause an increase in output.
B)cause no change in output.
C)cause a reduction in output.
D)a reduction in consumption.

Question 34

In 2010,the deficit-to-GDP ratio for the United States was approximately equal to

A)10%.
B)17%.
C)37%.
D)67%.

Question 35

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

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

Question 36

In the short run,an increase in government spending 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)none of the above

Question 37

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

A)the lower is government spending.
B)the lower is the level of debt,B.
C)the higher is inflation.
D)none of the above

Question 38

A major reason to be concerned about any U.S.budget deficit is that

A)if it were maintained,it would lead to an ever-increasing debt-to-GDP ratio.
B)it would exacerbate the problem of the low U.S.saving rate.
C)under current legislation,it would lead to budget surpluses in the future.
D)if it were to increase,Ricardian equivalence will no longer hold.
E)since large deficits are associated with wars,the deficit might encourage the U.S.to become more adventuristic in its foreign policy.

Question 39

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

A)deficits.
B)taxes.
C)exports.
D)all of the above
E)none of the above

Question 40

In the medium run,an increase in government spending 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)will not affect the composition of output but will affect the price level.
D)is neutral.
E)none of the above

Question 41

Which of the following is an entitlement program?

A)Social Security
B)Medicare
C)Medicaid
D)all of the above
E)none of the above

Question 42

Which of the following would decrease the cyclically adjusted deficit?

A)an increase in income
B)a decrease in income
C)an increase in the primary deficit
D)a decrease in the primary deficit
E)none of the above

Question 43

The deficit at natural level of output is called

A)full-employment deficit.
B)mid-cycle deficit.
C)structural deficit.
D)cyclically adjusted deficit.
E)all of the above

Question 44

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

A)ΔH
B)ΔH - ΔP
C) (ΔH) / P
D) (ΔH) / H
E)P[(ΔH) / H]

Question 45

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

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

Question 46

Siegnorage is equal to

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

Question 47

Hyperinflation typically leads to

A)a reduction in barter.
B)a reduction in real money balances.
C)a preference for domestic over foreign currency.
D)an increase in real tax revenues collected by the government.
E)all of the above

Question 48

Based on our understanding of the U.S.budget,we know that

A)government accounts treat asset sales as revenues.
B)government accounts do not treat asset sales as revenues.
C)the NIPA accounts treat asset sales as revenues.
D)neither the government accounts nor the NIPA accounts treat asset sales as revenues.

Question 49

In 2010,the debt-to-GDP ratio for the United States was approximately equal to

A)90%.
B)17%.
C)37%.
D)67%.

Question 50

Seignorage is defined as which of the following?

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

Question 51

Which of the following will cause an increase in the debt-to-GDP ratio?

A)a reduction in the real interest rate
B)a reduction in the ratio of the primary deficit to GDP
C)a reduction in the growth rate of output
D)all of the above

Question 52

Which of the following represents debt monetization?

A)an increase in the budget deficit that is financed by money creation
B)an increase in the budget deficit that is financed by foreigner investors' purchases of domestic bonds
C)an increase in the budget deficit that coincides with a central bank sale of bonds
D)an open market purchase of bonds that results in inflation
E)none of the above

Question 53

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

A)fine tuning.
B)debt monetization.
C)the structural deficit.
D)tax smoothing.
E)none of the above

Question 54

Hyperinflation refers to inflation in excess of ________ per month,

A)30%
B)10%
C)20%
D)25%

Question 55

The difference between the official and correct measures of the deficit will be smaller,

A)the higher is government spending.
B)the higher is the level of debt,B.
C)the smaller is inflation.
D)none of the above

Question 56

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

A)tax revenues are higher.
B)real money balances are larger.
C)the inflation rate is higher.
D)foreign lending is higher.
E)none of the above

Question 57

Very high debt burdens can result in

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

Question 58

During most episodes of hyperinflation,

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

Question 59

When a government partially defaults its debt,a "haircut" of 20% means that

A)creditors receive 20% of what they owed.
B)creditors receive 80% of what they owed.
C)creditors receive 40% of what they owed.
D)creditors receive 10% of what they owed.

Question 60

Government default is also called

A)debt restructuring.
B)debt rescheduling.
C)private sector involvement.
D)all of the above

Question 61

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

Question 62

Explain seignorage.

Question 63

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 64

What are the primary causes of hyperinflations? Explain.

Question 65

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 66

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.

Question 67

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

Question 68

Explain the economic costs of hyperinflation.

Question 69

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 70

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

Question 71

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

Question 72

Explain fiscal dominance.

Question 73

An increase in money growth,holding all other factors constant,will cause

A)a reduction in seignorage.
B)an increase in seignorage.
C)no change in seignorage.
D)an ambiguous effect on seignorage.

Question 74

For this question,assume that 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 "haircuts" when a government defaults its debt.

Question 76

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 77

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

Question 78

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

A)a reduction in seignorage
B)an increase in seignorage
C)no change in seignorage
D)an ambiguous effect on seignorage