Question 1

A higher deficit in the current year will lead to increased debt in the future only if:

Accepted Answer

The increase in debt in the future depends on whether or not future primary surpluses are less than the interest payment. If the primary surpluses are less, then the government will have to borrow more to pay off the interest, leading to an increase in debt. The other options do not necessarily lead to an increase in debt.

Question 2

In the hyperinflations between World War I and World War II, nominal money growth rates were:

Accepted Answer

In hyperinflations between World War I and World War II, nominal money growth rates were typically larger than what was necessary to maximize seignorage. This was due to a combination of factors such as war reparations, a lack of confidence in the government's ability to repay its debts, and the government's increased spending during wartime, which led to higher budget deficits. As a result, governments resorted to printing money at a much faster rate than necessary to finance their deficits, leading to hyperinflation.

Question 3

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

Accepted Answer

A

Question 4

The debt- to- GDP ratio is higher:

Accepted Answer

A higher real interest rate means that interest payments on the debt are higher, which increases the debt-to-GDP ratio.

Question 5

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

Accepted Answer

In virtually all hyperinflations, rapid money growth begins to occur because of fiscal dominance. This means that the government is consistently running large budget deficits and is financing them through the printing of money rather than borrowing from the public or foreign investors. As a result, there is an abundance of money in circulation which leads to a decrease in its value and inflationary pressures.

Question 6

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

Accepted Answer

When the budget deficit is financed entirely through money creation, the real budget deficit is equal to the nominal deficit (OH) divided by the price level (P), which is represented by OH/P.

Question 7

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

Accepted Answer

The answer of A rule of thumb for Australia is...

Question 8

In the short run, a fiscal contraction that causes a decrease in the budget deficit:

Accepted Answer

In the short run, a fiscal contraction (such as reduced government spending or increased taxes) that leads to a decrease in the budget deficit can affect both the level and composition of output. This is because reduced government spending or higher taxes can lead to lower aggregate demand, which not only reduces the overall level of economic activity (output) but can also shift the composition of output by affecting different sectors differently. For example, a cut in government spending on infrastructure would directly reduce demand in the construction sector, affecting its output more than other sectors.

Question 9

Which of the following is an entitlement program?

Accepted Answer

All three options, Medicare, Age pension, and Social Security, are entitlement programs. Entitlement programs are government programs that provide specific benefits or payments to individuals or groups of individuals who are eligible according to predetermined criteria. These programs are considered "entitlements" because people who meet the criteria are entitled to receive the benefits; there is no means testing or discretionary element involved in determining who receives the benefits.

Question 10

In the medium run, a fiscal contraction that causes a decrease in the budget deficit:

Accepted Answer

The answer of In the medium run, a fiscal contraction...

Question 11

Assume that real money balances do not change. Which of the following will occur if the central bank increases money growth?

Accepted Answer

Seignorage refers to the additional revenue that the government (or central bank) earns from printing money. When the central bank increases money growth, there will be more money in circulation, which means that the overall seignorage earned by the central bank will increase. This is because the central bank earns interest on the money it creates and lends out to commercial banks or the government. Therefore, an increase in money growth will lead to an increase in seignorage.

Question 12

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

Accepted Answer

Seignorage is the revenue earned by the government by printing money. A decrease in money growth means that the government is printing less money, which leads to a decrease in seignorage. Therefore, choice A is the correct answer.

Question 13

Which of the following will cause a decrease in the debt- to- GDP ratio?

Accepted Answer

An increase in the growth rate of output would cause the GDP to increase faster than the debt, leading to a decrease in the debt-to-GDP ratio. A higher real interest rate (A) would increase the cost of servicing the debt, thereby increasing the debt-to-GDP ratio. An increase in the ratio of the primary deficit to GDP (B) would increase the amount of borrowing needed to finance government spending, leading to a higher debt-to-GDP ratio. An increase in investment (C) or consumption (D) would increase GDP, but may not necessarily lead to a decrease in the debt-to-GDP ratio if the increase in GDP is not enough to offset the increase in debt.

Question 14

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

Accepted Answer

According to the Ricardian equivalence proposition, when the government increases its budget deficit, individuals anticipate future tax increases to pay off the debt. As a result, they increase their private saving to offset the expected future tax burden, leaving overall national saving unchanged.

Question 15

Very high debt burdens can result in:

Accepted Answer

Very high debt burdens can result in debt restructuring, which is the process of reorganizing and modifying existing debt agreements to reduce the burden of debt repayment. This can be achieved through various means such as negotiating lower interest rates, extending the repayment period, or even partial debt forgiveness.

Question 16

Using taxes to finance a war, rather than deficits:

Accepted Answer

Using taxes to finance a war rather than deficits shares less of the burden of the war with future generations and leads to a larger future capital stock. This is because when taxes are used, the cost of the war is spread out amongst the current generation, rather than future generations being burdened with the cost through interest payments on borrowed money. Additionally, using taxes to finance a war can encourage savings and investment, which can lead to a larger future capital stock.

Question 17

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

Accepted Answer

The official measure of the deficit is represented by the expression iB + G - T, where iB represents interest on the debt, G represents government spending, and T represents taxes. This formula captures the basic components of a government's budget deficit: the costs of servicing existing debt, the total spending, and the total tax revenue.

Question 18

During most episodes of hyperinflation:

Accepted Answer

During most episodes of hyperinflation, the inflation rate increases over time, leading to rapid devaluation of the currency. This is usually caused by an increase in the money supply without a corresponding increase in the supply of goods and services. Governments often resort to hyperinflation when they are unable to finance their expenditures through taxation or borrowing, and instead they print money to pay for their expenses. This can lead to a vicious cycle where inflation begets more inflation, as people try to spend their money as quickly as possible and businesses raise prices to keep pace with rising costs. Eventually, this can lead to the collapse of the currency and severe economic hardship for the population.

Question 19

The Australian official and inflation- adjusted fiscal balance measures since 1990 have been close because:

Accepted Answer

Inflation and net government debt have been low, so the effect on the fiscal balance measure from adjusting for inflation is minimal. This means the nominal and inflation-adjusted measures will be close to each other.

Question 20

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

Accepted Answer

The United States government financed the additional government spending during World War II through increases in both the deficit and taxes. The government increased taxes on income, excess profits, and estates, and raised funds by borrowing from the public through the sale of war bonds. The deficit also increased due to the increased government spending on war efforts.

Quiz 23: Fiscal Policy: a Summing up