Question 1

Economists generally express the U.S. budget deficit as:

Accepted Answer

Economists generally express the U.S. budget deficit as a percentage of total GDP. This is because GDP provides a measure of the overall size of the economy and therefore the relative size of the deficit. A deficit expressed as a percentage of GDP can also help to compare the deficit to the historical averages or other countries' deficits.

Question 2

The total amount of money that a government owes at any one point in time is called:

Accepted Answer

The term "public debt" refers to the total amount of money that a government owes at any given time. A budget deficit refers to when a government's spending exceeds its revenue in a given year, while a budget surplus refers to when a government's revenue exceeds its spending in a given year. A national surplus is not a commonly used term to refer to a government's financial situation.

Question 3

After running the numbers on a new Green Job plan, the CBO projects that the government _______ will increase by $40 billion each year, and _______ will increase $400 billion over the project's lifespan.

Accepted Answer

The correct answer is C) deficit; debt. The deficit refers to the annual difference between government spending and revenue, while the debt is the total amount owed over time. If the government's deficit increases by $40 billion each year, it means they are spending more than they are earning annually. The increase in debt by $400 billion over the project's lifespan indicates the accumulation of these deficits over time.

Question 4

The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence:

Accepted Answer

Ricardian equivalence is the economic theory that suggests that people anticipate future taxes when making spending or saving decisions, therefore tax cuts may not stimulate spending because people expect the tax cuts to be offset by future tax increases. If Ricardian equivalence fails to hold and people do not anticipate future tax increases, they may increase their spending in response to tax cuts, making the stimulus strategy more effective. Therefore, the best choice is C.

Question 5

Transfer payments:

Accepted Answer

Transfer payments are payments made from government accounts to individuals for programs that do not involve a purchase of goods or services. These payments are not included in GDP calculations as they do not represent the production of new goods or services. Transfer payments do not transfer goods or services to eligible participants, they transfer money.

Question 6

Since 1940, the U.S. government has generally had a:

Accepted Answer

Since 1940, the U.S. government has generally run on a budget deficit where expenditures exceeded revenue. There have only been a few years where the budget was balanced or in surplus.

Question 7

The budget deficit may increase when:

Accepted Answer

A budget deficit occurs when government spending exceeds tax revenue. Therefore, if tax revenues decrease (due to factors such as a recession or tax cuts) and government spending increases (due to factors such as increased military spending or stimulus spending), it is likely that the budget deficit will increase.

Question 8

A budget deficit is the:

Accepted Answer

A budget deficit occurs when a government spends more money than it brings in through net revenue, resulting in a shortfall that needs to be funded through borrowing or other means.

Question 9

A budget surplus is the:

Accepted Answer

A budget surplus is when a government's net revenue exceeds its total expenditures. In other words, it brings in more money than it spends. Option A is incorrect because it describes a budget deficit, where a government spends more money than it brings in. Option C is incorrect because it relates to a government's debt, not its surplus. Option D is incorrect because a tax increase would increase the government's revenue, but does not necessarily mean it has a surplus.

Question 10

During a recession, government deficits grow because:

Accepted Answer

During a recession, government deficits can grow due to an increase in government spending as part of expansionary fiscal policy, a decrease in income tax revenues caused by people earning less, and a decrease in sales tax revenues caused by people spending less. All of these factors contribute to the growth of government deficits during a recession.

Question 11

Suppose the country of Piedmont borrows money to start a brand-new infrastructure program. GDP is currently $400 billion. The plan will take the public debt from $250 billion to $350 billion in ten years, when GDP is projected to be $425 billion. What is the projected debt in ten years as a percentage of GDP?

Accepted Answer

The answer of Suppose the country of Piedmont borrows money...

Question 12

All else equal, Ricardian equivalence predicts:

Accepted Answer

Ricardian equivalence suggests that consumers anticipate future taxes to pay for government debt, so they save any tax cuts to pay for future tax increases, leading to a low multiplier effect from tax cuts.

Question 13

All else equal, Ricardian equivalence predicts that people in an economy will have a low _______ in response to a tax cut.

Accepted Answer

Ricardian equivalence suggests that people anticipate future taxes to pay off government debt, so they save rather than spend a tax cut, leading to a low marginal propensity to consume.

Question 14

Ricardian equivalence will fail to hold if:

Accepted Answer

Ricardian equivalence states that individuals save any extra income they receive, including tax rebates, because they expect future taxes to rise to pay for any current tax cuts. If consumers increase their spending when they receive a tax rebate check, it contradicts the theory of Ricardian equivalence. Therefore, choice A is correct. B is incorrect because it is expected under Ricardian equivalence. C is not necessarily true or false and does not relate to the concept of Ricardian equivalence.

Question 15

The government budget includes money:

Accepted Answer

The government budget includes all of these elements. Tax revenues are a major source of income for governments, which they subsequently use to finance necessary government purchases. Furthermore, some government programs make cash payments to individuals or groups, which are not necessarily in direct exchange for goods or services.

Question 16

Economists express the budget deficit:

Accepted Answer

Economists express the budget deficit as a percentage of GDP because GDP is a measure of the economy's overall size and provides context for the deficit. A deficit of 5% of GDP is more significant for a larger economy than for a smaller one, for example.

Question 17

Ricardian equivalence predicts that:

Accepted Answer

Ricardian equivalence suggests that consumers anticipate future tax obligations to finance current government spending. Therefore, a tax cut without a change in government spending won't alter consumer behavior, as they save the tax cut in anticipation of future tax increases to cover the unchanged government spending.

Question 18

Payments from government accounts to individuals for programs that do not involve a purchase of goods or services are called:

Accepted Answer

Transfer payments refer to government accounts paying individuals for programs like social security, unemployment benefits, and other welfare programs, which do not involve a purchase of goods or services. Discretionary funds and grants both involve the government providing funds for certain purposes, but they typically involve the purchase of goods or services. Fiscal policy refers to the use of government spending and taxation to influence the economy as a whole.

Question 19

After a devastating hurricane hits the Gulf Coast of Florida, Congress authorizes $50 billion in emergency spending to help families rebuild. Assuming the government already spends more than it makes in revenue, this plan will:

Accepted Answer

The plan will increase both the debt and the deficit by $50 billion each. The deficit increases because it's the difference between what the government spends and what it earns, and the debt increases because it's the accumulation of deficits over time.

Question 20

Suppose the country of Piedmont borrows money to start a brand-new infrastructure program. GDP is currently $400 billion. The plan will take the public debt from $250 billion to $350 billion in ten years, when GDP is projected to be $425 billion. What is the current debt as a percentage of GDP?

Accepted Answer

The current debt as a percentage of GDP is calculated by dividing the current debt ($250 billion) by the current GDP ($400 billion) and then multiplying by 100 to convert to a percentage: ($250 billion / $400 billion) * 100 = 62.5%.

Quiz 13: Fiscalpolicy