Question 1

The budget deficit or surplus is:

Accepted Answer

The budget deficit or surplus can be difficult to measure and can be defined legitimately in several ways. Different accounting practices can also impact the measurement of the deficit or surplus. Therefore, it is important to consider the methodology used to calculate the deficit or surplus when analyzing budgetary data.

Question 2

When the economy is operating close to potential, the budget deficit experienced is:

Accepted Answer

When the economy is operating close to its potential, the budget deficit experienced is primarily structural. This is because structural deficits are the result of deliberate policy choices regarding spending and taxation levels, rather than fluctuations in economic activity. Cyclical deficits, on the other hand, occur when the economy is underperforming or in a downturn, which is not the case when it is operating close to potential.

Question 3

The structural deficit:

Accepted Answer

The structural deficit is the part of the budget deficit that remains even when the economy is at its potential output, meaning it is not affected by changes in actual income but by changes in potential income.

Question 4

If taxes and government expenditures were constant and did not vary with income, then:

Accepted Answer

Cyclical deficits are fluctuations in government budget due to changes in the economy such as recessions or booms. If taxes and government expenditures were constant and did not vary with income, then there would be no fluctuations in the budget, and hence no cyclical deficits.

Thus, option B is correct.

Question 5

If an economy operates below potential income, the actual deficit is:

Accepted Answer

When an economy operates below potential income, it means that the actual output and income are lower than what the economy is capable of producing. This also implies that the tax revenue generated by the government is also lower than what it could be in a fully employed economy. As a result, the actual deficit, which is the difference between government spending and tax revenue, is larger than the structural deficit, which is the deficit that would exist even if the economy was operating at its potential.

Question 6

The cyclical deficit:

Accepted Answer

The cyclical deficit increases when the economy is performing below its potential output because tax revenues decrease and government spending on unemployment benefits and other automatic stabilizers increases, leading to a higher deficit.

Question 7

A policy of fiscal austerity could have difficulty lowering the debt-to-GDP ratio because it might:

Accepted Answer

If the government implements a policy of fiscal austerity, it may involve cutting government spending and raising taxes to reduce the budget deficit, which can lower GDP growth and government revenue. This can create a vicious cycle where lower government revenues and slow growth make it harder to reduce the debt-to-GDP ratio. Therefore, a policy of fiscal austerity may not be effective in reducing the debt-to-GDP ratio if it leads to lower GDP growth and government revenue.

Question 8

Economists who focus on the need for fiscal austerity tend to focus on

Accepted Answer

Economists who focus on the need for fiscal austerity tend to prioritize the long run implications of government spending and debt, rather than short term economic growth. Austerity measures may include cuts to government programs and services, as well as increased taxes or reduced government spending. These actions are taken to reduce the deficit and debt accrued by the government, which is seen as necessary for long term economic stability.

Question 9

The budget deficit or surplus is:

Accepted Answer

The budget deficit or surplus is hard to calculate because economists often disagree on the methods and criteria for computing it, leading to variations in calculations.

Question 10

During World War II, the economic boom that raised U.S.equilibrium income above potential income:

Accepted Answer

The economic boom during World War II raised U.S. equilibrium income above potential income, which would have increased tax revenues and decreased government spending on unemployment benefits and other social services, thus reducing or eliminating any cyclical deficit. Cyclical deficits occur when an economy is operating below its potential output, leading to lower tax revenues and higher government spending.

Question 11

A government can finance its budget deficit by doing all of the following except:

Accepted Answer

Buying bonds is a method used by investors, including individuals and institutions, to lend money to the government. When a government is financing its budget deficit, it does so by borrowing money, which can involve selling bonds to investors (not buying them), borrowing from its central bank, or printing money. Buying bonds would actually be a way for the government to spend its resources, not to finance a deficit.

Question 12

If income falls below its potential and the income tax rate is reduced, this will:

Accepted Answer

The answer of If income falls below its potential and...

Question 13

Deficits and surpluses are best viewed as:

Accepted Answer

Deficits and surpluses are primarily used to summarize a nation's fiscal policy, reflecting the government's spending and revenue collection decisions.

Question 14

A cyclical deficit is the portion of the deficit that exists when:

Accepted Answer

A cyclical deficit occurs when the economy is operating below potential income, which means there is a gap between actual and potential output. This results in lower tax revenue, higher transfer payments, and increased government spending on programs such as unemployment benefits. Therefore, the correct choice is B.

Question 15

Compared to the predictions of the standard AS/AD model, the structural stagnation model implies that the:

Accepted Answer

The structural stagnation model implies that the structural deficit is higher because it suggests an economy experiencing long-term stagnation due to structural issues, leading to lower growth and higher deficits compared to the standard Aggregate Supply/Aggregate Demand (AS/AD) model predictions.

Question 16

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

Accepted Answer

The structural deficit is the difference between potential income and spending, regardless of actual income levels. Therefore, it is not affected by the actual income or tax revenue. The structural deficit in this scenario is $50 billion ($350 billion potential income - $300 billion actual income - $20 billion deficit), which is not one of the answer choices.

Question 17

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income.If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the cyclical deficit:

Accepted Answer

The answer of Suppose potential income is $60 billion, actual...

Question 18

If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

Accepted Answer

The answer of If actual income is $300 billion, potential...

Question 19

If a cyclical surplus exists, the economy must be:

Accepted Answer

A cyclical surplus occurs when actual output is above potential output, indicating that the economy is operating above its full capacity. This can lead to inflationary pressures in the long run.

Question 20

When the government runs a deficit, it will:

Accepted Answer

When the government runs a deficit, it needs to finance the shortfall by borrowing money from the public. The way in which the government borrows money is by selling bonds to investors. Therefore, the correct choice is B - the government sells bonds to finance the deficit. Buying bonds (A) is the opposite of what the government needs to do, as it needs to raise money, not spend it. Reducing the money supply (C) would be contractionary and is not necessary to finance the deficit. Raising taxes immediately (D) could be an option but is not the only way to finance a deficit and could have negative effects on the economy.

Quiz 31: Deficits and Debt: the Austerity Debate

The budget deficit or surplus is:

When the economy is operating close to potential, the budget deficit experienced is:

The structural deficit:

If taxes and government expenditures were constant and did not vary with income, then:

If an economy operates below potential income, the actual deficit is:

The cyclical deficit:

A policy of fiscal austerity could have difficulty lowering the debt-to-GDP ratio because it might:

Economists who focus on the need for fiscal austerity tend to focus on

The budget deficit or surplus is:

During World War II, the economic boom that raised U.S.equilibrium income above potential income:

A government can finance its budget deficit by doing all of the following except:

If income falls below its potential and the income tax rate is reduced, this will:

Deficits and surpluses are best viewed as:

A cyclical deficit is the portion of the deficit that exists when:

Compared to the predictions of the standard AS/AD model, the structural stagnation model implies that the:

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income.If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the cyclical deficit:

If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

If a cyclical surplus exists, the economy must be:

When the government runs a deficit, it will: