Question 1

The diagram below shows two budget deficit functions for a hypothetical economy.
  FIGURE 32- 2
-Refer to Figure 32- 2. Initially, suppose the economy is at point A. If the level of potential output were 300, the cyclically adjusted budget deficit would be

Accepted Answer

The answer of The diagram below shows two budget deficit...

Question 2

Consider a government with a positive stock of debt, and suppose the real interest rate on government bonds equals the rate of growth of real GDP. In this case, the government's debt- to- GDP ratio will rise only if

Accepted Answer

The primary budget deficit refers to the difference between government spending and revenue, excluding interest payments. If there is a primary budget deficit, it means that the government is spending more than it is taking in, even before accounting for the interest payments on its debt. Therefore, the debt-to-GDP ratio would continue to rise, even if the real interest rate on government bonds equals the rate of growth of real GDP.

Question 3

If voters want to know how their tax dollars are being spent and how the federal government is managing its current spending, they should look at

Accepted Answer

The answer of If voters want to know how their...

Question 4

The policy objective of an annually balanced government budget

Accepted Answer

An annually balanced budget is difficult to achieve because government revenues and expenditures can fluctuate due to economic cycles. It would be destabilizing because it could force the government to cut spending or raise taxes during a recession, worsening the economic downturn.

Question 5

The diagram below is for a closed economy which begins in long- run equilibrium at Y*.
  FIGURE 32- 3
-Refer to Figure 32- 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 increases aggregate demand, leading to an inflationary gap, higher price level (P₁), and increased real GDP (Y₁).

Question 6

If the government's total budget surplus is $10 billion and its debt- service payments are $8 billion, then its primary budget surplus is

Accepted Answer

The answer of If the government's total budget surplus is...

Question 7

The diagram below shows the budget deficit function for a hypothetical economy.
  FIGURE 32- 1
-Refer to Figure 32- 1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by decreasing lump- sum taxes, then

Accepted Answer

An expansionary fiscal policy, such as decreasing lump-sum taxes, typically increases the budget deficit, causing the budget deficit function to shift up.

Question 8

Suppose the budget deficit falls from one year to the next, but there has been no change in the government's fiscal policy. The change in the budget deficit can be explained by

Accepted Answer

If there has been no change in the government's fiscal policy, then a reduction in the budget deficit must be due to an increase in tax revenue or a decrease in government spending, which can be caused by an increase in real GDP. As real GDP increases, tax revenue increases and government spending on income-support programs like unemployment insurance and welfare decreases because fewer people need them.

Question 9

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 answer of In general, the government will have flexibility...

Question 10

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

Accepted Answer

Decreasing government expenditures can lead to a reduction in essential government services such as healthcare, resulting in longer wait times and queues for services. This can be a cost to society as it may affect the overall wellbeing of individuals and their quality of life.

Question 11

The Canadian federal debt- to- GDP ratio reached a high of about percent in 1996. By 2009, the debt- to GDP ratio had percent.

Accepted Answer

The question states that the debt-to-GDP ratio reached a high of about percent in 1996 and had fallen by 2009. Only choice A fits this description, as the debt-to-GDP ratio is stated to have fallen to less than 30 percent in 2009.

Question 12

The diagram below shows the budget deficit function for a hypothetical economy.
  FIGURE 32- 1
-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

Financing projects that deliver long-term benefits to society, such as infrastructure development or research and development, can have positive spillover effects on future generations. These investments may result in increased economic growth, improved living standards, and increased productivity, which can benefit future generations. However, paying subsidies, making transfers, or purchasing goods not available in the local economy may not have the same long-term benefits and may not be sustainable solutions for a budget deficit. Ensuring that all interest paid goes to residents rather than foreigners may have some benefits, but it may not be enough to offset the negative effects of a budget deficit.

Question 13

Suppose during one fiscal year, government purchases are $195 billion, debt- service payments are $22 billion and net tax revenues are $208 billion. What is the government's primary budget deficit/surplus?

Accepted Answer

The primary budget surplus is calculated as net tax revenues minus government purchases, excluding debt-service payments. So, $208 billion (net tax revenues) - $195 billion (government purchases) = $13 billion surplus.

Question 14

The government's cyclically adjusted budget deficit (CAD)adjusts for

Accepted Answer

The cyclically adjusted budget deficit (CAD) adjusts for changes in spending or tax revenues caused by fluctuations in national income. It takes into account the fact that during economic downturns, tax revenues may fall while spending on social welfare programs may rise, leading to a larger budget deficit. By adjusting for these fluctuations, the CAD provides a more accurate picture of the government's budget position independent of the business cycle.

Question 15

Suppose the government decided to ensure that its cyclically adjusted budget deficit was always zero. This policy would be problematic because

Accepted Answer

A cyclically adjusted budget deficit of zero would eliminate the automatic stabilizers that help moderate economic fluctuations, acting as a destabilizer.

Question 16

a burden on future generations who will have to pay interest to the owners of government bonds.

Accepted Answer

The answer of a burden on future generations who will...

Question 17

The diagram below shows the budget deficit function for a hypothetical economy.
  FIGURE 32- 1
-Refer to Figure 32- 1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements a contractionary fiscal policy by decreasing its purchases of goods and services, then

Accepted Answer

The answer of The diagram below shows the budget deficit...

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

A fiscal expansion increases government spending, which leads to an increase in demand for goods and services in the economy. This increase in demand can lead to an appreciation of the currency, as other countries see Canada as a more attractive place to invest. This increase in demand can also lead to higher interest rates, which can discourage private investment. Additionally, the increase in demand for goods and services can lead to increased imports, which can crowd out net exports. Therefore, a fiscal expansion by the government tends to attract foreign capital, appreciate the currency, and crowd out net exports.

Question 20

In any given year, the government's debt- service payments are

Accepted Answer

Debt-service payments refer to the interest payments on the outstanding stock of government debt. This is independent of the government deficit as it refers to the interest owed on previously borrowed money. It also includes payments to both domestic and foreign holders of government debt.

Quiz 32: Government Debt and Deficits

The diagram below shows two budget deficit functions for a hypothetical economy. FIGURE 32- 2 -Refer to Figure 32- 2. Initially, suppose the economy is at point A. If the level of potential output were 300, the cyclically adjusted budget deficit would be