Question 1

Consider the governmentʹs debt-to-GDP ratio. A significant reason for a government to maintain a low debt-to-GDP ratio is so that

Accepted Answer

Maintaining a low debt-to-GDP ratio gives the government flexibility to use expansionary fiscal policy, such as increasing government spending or cutting taxes, to stimulate the economy during recessions. This can help prevent or mitigate the negative effects of a recession, such as high unemployment or slow economic growth. A high debt-to-GDP ratio may limit the government's ability to use expansionary fiscal policy, as it may be seen as fiscally irresponsible and could lead to concerns about the government's ability to repay its debt.

Question 2

There is a long-term burden of government debt in a closed economy when

Accepted Answer

The answer of There is a long-term burden of government...

Question 3

It can be argued that a government budget deficit, rather than being a burden for future generations, may provide net benefits to future generations. This view is correct if the current budget deficit is used to

Accepted Answer

Option B is the best choice because financing projects that deliver long-term benefits to society, such as infrastructure development, education, and healthcare, can result in increased productivity and competitiveness, which in turn can lead to economic growth and higher living standards. These benefits can be enjoyed by future generations, potentially outweighing any initial costs associated with the deficit. On the other hand, options A, C, D, and E may provide short-term benefits or address specific issues but may not contribute to long-term economic growth and sustainability.

Question 4

In general, the government will have flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is relative to the size of GDP.

Accepted Answer

The government will have more flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is small relative to the size of GDP. This is because a smaller debt relative to GDP means the government can more easily borrow additional funds if needed to stimulate the economy or implement other policy measures without facing high borrowing costs or risking fiscal sustainability.

Question 5

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0.
  FIGURE 31-3
-Refer to Figure 31-3. Suppose the government in this closed economy implements an expansionary fiscal policy, which increases the budget deficit. When the economy reaches its new long -run equilibrium, how has the composition of national income changed?

Accepted Answer

The answer of The diagram below is for a closed...

Question 6

An annually balanced government budget is a

Accepted Answer

The answer of An annually balanced government budget is a
...

Question 7

If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was falling it would have to

Accepted Answer

A balanced budget rule requires the government to balance its spending with its revenues. During times of falling GDP, to maintain a balanced budget, the government would likely need to increase tax rates and/or decrease spending. This could further destabilize the economy by reducing aggregate demand.

Question 8

In the long run, the government budget will add to sustained inflation if

Accepted Answer

Continual deficits that are financed by the continual creation of new money will eventually lead to sustained inflation as the increase in the money supply reduces the value of each individual unit of currency. This is because there is more money in circulation without a corresponding increase in the supply of goods and services, leading to a rise in prices over time.

Question 9

The policy objective of an annually balanced government budget

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The answer of The policy objective of an annually balanced...

Question 10

Decreasing government expenditures in order to reduce the governmentʹs budget deficit can involve certain costs. An example of such a cost could be

Accepted Answer

Decreasing government expenditures can lead to cuts in essential services such as healthcare, which can result in longer queues and waiting times, ultimately becoming a cost for citizens who rely on these services.

Question 11

An annually balanced government budget is a difficult policy goal to achieve because

Accepted Answer

All of the given options contribute to the difficulty in achieving an annually balanced government budget. The government's budget is made up of both discretionary and mandatory spending, and the latter is beyond their control. Moreover, interest rate charges on the government's debt are subject to market forces, which are outside of the government's influence. Additionally, tax revenues are affected by economic cycles, and transfer payments which are automatic stabilization key tools, rise during recessions and fall during economic booms.

Question 12

The concept of capital budgeting refers to the idea that

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The answer of The concept of capital budgeting refers to...

Question 13

If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was rising it would have to

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The answer of If the Canadian federal government adopted a...

Question 14

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

Increased government budget deficits lead to an increase in the demand for funds, which causes an increase in interest rates. As a result, foreign investors will find investing in the domestic economy more attractive, resulting in a significant inflow of financial capital that causes the currency to appreciate. This appreciation of the currency will make exports more expensive and imports cheaper, ultimately causing a fall in net exports.

Question 15

Many economists argue that the long-term burden of government debt will include:
1) a redistribution of resources away from future generations toward the current generation;
2) reduced investment and as a result a lower long-run rate of economic growth;
3) a burden on future generations who will have to pay interest to the owners of government bonds.

Accepted Answer

The statement mentions three long-term effects of government debt: a redistribution of resources away from future generations towards the current generation, reduced investment, and a burden on future generations who will have to pay interest to the owners of government bonds. Therefore, both choices 1 and 3 are correct, and since option C includes both of them, it is the best choice. Option 2 is also correct, but it is not sufficient since it only addresses one of the three mentioned effects.

Question 16

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0.
  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 an) gap, and a new short -run equilibrium with a price level of and real GDP of .

Accepted Answer

Expansionary fiscal policy, which increases the budget deficit, initially leads to an inflationary gap. This is because the increase in government spending or decrease in taxes boosts aggregate demand, moving the economy to a higher level of output (real GDP) than the full employment level (Y*). The correct answer indicates an inflationary gap with the price level remaining at P1 initially and real GDP increasing to Y1, reflecting the short-term impact before any price level adjustments.

Question 17

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0.
  FIGURE 31-3
-Refer to Figure 31-3. Suppose the government implements an expansionary fiscal policy, which increases the budget deficit. The economyʹs adjustment process returns real GDP to Y* in the long run. Since real GDP is not affected in the long run, how are future generations likely to be harmed by this government policy?

Accepted Answer

The expansionary fiscal policy that increases the budget deficit may lead to increased government borrowing, which can increase interest rates and crowd out private investment. This crowding out effect can result in a lower future growth rate of potential GDP, which can harm future generations. Option A is also a possible answer, but it is less likely to be the best choice as it is not clearly stated in the diagram that investment in public infrastructure has been crowded out. Options C and D are not relevant to the given diagram and option E is not correct as any government policy can have an impact on future generations, whether positive or negative.

Question 18

An annually balanced government budget would tend to

Accepted Answer

The answer of An annually balanced government budget would tend...

Question 19

Financing a budget deficit by increasing the money supply will

Accepted Answer

Financing a budget deficit by increasing the money supply will create greater inflationary pressure. This is because increasing the money supply without a corresponding increase in the production of goods and services will lead to too much money chasing too few goods, thereby increasing the general price level.

Question 20

Until the onset of the most recent recession in 2009, Canadian governments federal and provincial) had been running budget surpluses for about 10 years. Economic theory suggests that, other things being equal, these budget surpluses will lead to

Accepted Answer

Budget surpluses lead to an increase in national saving, which, in turn, leads to a decrease in interest rates. Lower interest rates stimulate investment and net exports, leading to a "crowding in" effect. Therefore, choice A is the best answer.

Quiz 31: Government Debt and Deficits