Question 1

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3%
- growth rate of real GDP = 3%
- current debt-to-GDP ratio = 25%
- primary budget surplus as a percentage of GDP = 2%
Over this one-year period,the debt-to-GDP ratio will have

Accepted Answer

The answer of Consider the following data about government debt...

Question 2

In an open economy like Canada's,a fiscal expansion by the government tends to

Accepted Answer

In an open economy, a fiscal expansion often leads to higher interest rates as the government borrows more. This attracts foreign capital, appreciating the currency. A stronger currency makes exports more expensive and imports cheaper, which tends to reduce net exports. This process does not necessarily encourage private investment directly; rather, the increased demand for the domestic currency and the subsequent appreciation can crowd out net exports by making them less competitive internationally.

Question 3

The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that

Accepted Answer

When the government increases its budget deficit, it will need to borrow more, which will increase demand for loanable funds and raise interest rates. This increase in interest rates will make it more attractive for foreign investors to invest in the economy, leading to an inflow of financial capital. As more foreign investors purchase domestic currency, the currency appreciates. A more expensive currency makes exports more expensive and less competitive globally, resulting in a decrease in net exports. This is why increases in government budget deficits in an open economy tend to crowd out net exports.

Question 4

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 2%
- growth rate of real GDP = 3%
- current debt-to-GDP ratio = 50%
- primary budget deficit = 0
Over this one-year period,the debt-to-GDP ratio will have

Accepted Answer

The debt-to-GDP ratio will fall because the growth rate of real GDP (3%) is higher than the real interest rate on government bonds (2%), and there is no primary budget deficit. The difference of 1% applied to the 50% debt-to-GDP ratio results in a decrease of 0.5 percentage points.

Question 5

Suppose the government's objective is to hold its debt-to-GDP ratio constant at its current level of 30%.If the real interest rate on government bonds is 4% and the growth rate of real GDP is 2%,the government must

Accepted Answer

To hold its debt-to-GDP ratio constant at 30%, the government would need to match its primary budget deficit (the budget deficit excluding interest payments) with the interest payments on its debt. In this case, the real interest rate on government bonds is 4%, so the government would need to run a primary budget surplus of 4% - 2% (the difference between the interest rate and real GDP growth) = 2% of GDP. Since the government's current debt-to-GDP ratio is 30%, its overall budget deficit would need to be reduced by 30% / 2% = 15% of GDP to achieve this primary budget surplus. Therefore, the government would need to run a primary budget surplus of 0.6% of GDP (0.02 x 0.3 = 0.006) to hold its debt-to-GDP ratio constant. This means that the correct choice is D.

Question 6

Consider a closed-economy AD/AS macro model.A policy-induced increase in the government's budget deficit is most likely to crowd-out private investment if

Accepted Answer

An increase in government budget deficit would lead to an increase in demand for loanable funds, which would increase the interest rates. Higher interest rates would reduce private investment, leading to crowding-out. Therefore, if interest rates rise sharply as a result of the deficit, private investment is most likely to be crowded-out.

Question 7

In an open economy like Canada's,a policy-induced increase in the government's budget deficit tends to

Accepted Answer

An increase in the government's budget deficit leads to an increase in demand for loanable funds, which raises the interest rates. As a result, foreign investors will be attracted to invest in Canada, leading to an increase in the demand for Canadian dollars and the appreciation of the currency. However, the increase in interest rates also leads to a decrease in net exports as it results in a stronger currency, making exports more expensive and imports cheaper. This means that an increase in the government's budget deficit tends to attract foreign capital and crowd out net exports.

Question 8

Consider a government with an outstanding stock of public debt.If,in any given year,the government has a primary budget surplus and the real interest rate on government bonds is more than the growth rate of real GDP,then

Accepted Answer

The answer of Consider a government with an outstanding stock...

Question 9

The concept of "national saving" refers to the

Accepted Answer

National saving refers to the sum of both private and government saving. It includes all the income that is not spent on consumption by individuals and by the government.

Question 10

Consider a closed-economy AD/AS macro model.An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ private investment.

Accepted Answer

An expansionary fiscal policy involves increasing government spending or decreasing taxes which leads to an increase in aggregate demand. This increase in aggregate demand is primarily driven by an increase in government expenditure. This leads to an increase in the government's budget deficit (as spending increases funding needs to increase). However, as aggregate demand increases, there is more pressure on the economy resulting in higher interest rates, which in turn decreases private investment. Therefore, the correct answer is C.

Question 11

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3%
- growth rate of real GDP = 1%
- current debt-to-GDP ratio = 40%
- primary budget deficit as a percentage of GDP = 2%
Over this one-year period,the debt-to-GDP ratio will have risen by

Accepted Answer

The change in the debt-to-GDP ratio can be calculated by considering the interest cost on the existing debt and the primary deficit. The interest cost on the debt is 3% of 40% (the debt-to-GDP ratio), which is 1.2%. The primary deficit adds another 2% to the debt. However, because the GDP is growing at 1%, the ratio's increase is slightly mitigated. The net effect is an increase of 1.2% (interest cost) + 2% (primary deficit) - 1% (growth adjustment) = 2.2%. However, the correct calculation for the growth adjustment should factor in how the growing GDP denominator affects the overall ratio, leading to a slight underestimation in this explanation. The precise calculation involves more nuanced dynamics of how debt, deficits, and GDP growth interact, but the closest answer given the options and considering a basic approximation is 2.8 percentage points, acknowledging a slight discrepancy in the explanation's simplification.

Question 12

What economists call "government saving",or "public saving" is the same as the

Accepted Answer

Government saving, also known as public saving, refers to the difference between the government's tax revenue and government expenditure. When government tax revenue exceeds government expenditure, there is a surplus, which is the same as the government's actual budget surplus.

Question 13

Consider an open-economy AD/AS macro model.An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ net exports.

Accepted Answer

Expansionary fiscal policy typically increases government spending or decreases taxes, leading to a higher budget deficit. It can also cause the domestic currency to appreciate due to higher interest rates attracting foreign capital, which tends to decrease net exports as domestic goods become more expensive for foreigners.

Question 14

An illustration of "crowding out" in macroeconomics is best provided by

Accepted Answer

Crowding out occurs when government spending increases, which leads to increased interest rates and decreased private investment. In this scenario, a fiscal expansion (government spending increases) raises interest rates, making it more expensive for businesses to borrow money, which in turn decreases private investment.

Question 15

In an open economy with internationally mobile financial capital,we would expect a policy-induced increase in the government's budget deficit to crowd out

Accepted Answer

In an open economy with mobile capital, a budget deficit can lead to higher interest rates, attracting foreign capital and appreciating the currency, which reduces net exports more than investment.

Question 16

Suppose the real rate of interest on government bonds is 4% and the growth rate of real GDP is 2%.If the government has a positive stock of outstanding debt and its policy objective is to hold the debt-to-GDP ratio constant at its current level,it must

Accepted Answer

In order for the government to hold the debt-to-GDP ratio constant, it must ensure that the growth rate of the debt is equal to the growth rate of GDP. The real interest rate on government bonds is 4%, which means that in order for the debt to grow at a rate of 2%, the government must run a primary budget surplus (revenues exceed expenditures) of at least 2%. Therefore, the correct answer is E – run a primary budget surplus. Running an annually balanced budget or a cyclically balanced budget would not guarantee that the debt-to-GDP ratio remains constant, as it would depend on the level of the deficit or surplus relative to the growth rate of GDP. Eliminating the overall deficit would also not guarantee that the debt-to-GDP ratio remains constant, as it would depend on the level of outstanding debt relative to GDP.

Question 17

Suppose the real rate of interest is 3% and the growth rate of real GDP is 1%.If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant at its current level,then it

Accepted Answer

To hold the debt-to-GDP ratio constant at its current level, the government must run a primary budget surplus. This means that government revenues must exceed non-interest expenditures. Since the real rate of interest is 3% and the growth rate of real GDP is 1%, the debt-to-GDP ratio will increase by 2% each year (3% - 1% = 2%). Therefore, a primary budget surplus (i.e. government revenues exceeding non-interest expenditures) equal to or greater than 2% of GDP would be required to hold the debt-to-GDP ratio constant.

Question 18

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and  .  FIGURE 31-3 Refer to Figure 31-3.Suppose the government implements an expansionary fiscal policy which increases the budget deficit.The initial effect of this policy is the opening of a(n)________ gap,and a new short-run equilibrium with a price level of ________ and real GDP of ________.

Accepted Answer

An expansionary fiscal policy will increase aggregate demand, leading to an increase in both the price level and real GDP in the short run. This will result in a new short-run equilibrium point at a higher price level and higher output level (Y₁). However, this new equilibrium point will also be to the right of the long-run aggregate supply curve, indicating that the economy is producing beyond its potential output level and putting inflationary pressure on prices, hence the price level will be higher (P₁). Therefore, the answer is D.

Question 19

Consider a government with an outstanding stock of public debt.If,in any given year,the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP,then

Accepted Answer

If the government has a primary budget surplus, it means that it is able to cover its current expenses without relying on borrowing. If the real interest rate on government bonds is less than the growth rate of real GDP, it means that the economy is growing faster than the interest rate on the government's debt, making it easier for the government to pay that debt off over time. As a result, the debt-to-GDP ratio will fall, as the economy is growing faster than the outstanding debt.

Question 20

Consider a closed-economy AD/AS model.If an increase in the government's budget deficit drives up market interest rates,

Accepted Answer

When the government's budget deficit increases, it borrows more money which increases the demand for loanable funds in the economy. This pushes up market interest rates as lenders will demand higher rates to lend out their money. As a result, some private investment expenditure will probably be crowded out as borrowing becomes more expensive, reducing the level of aggregate demand. Therefore, choice D is the best answer.

Quiz 31: Government Debt and Deficits

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 25% - primary budget surplus as a percentage of GDP = 2% Over this one-year period,the debt-to-GDP ratio will have