Question 1

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending:

Accepted Answer

A tax cut without a cut in government spending stimulates consumer spending in the short run because people have more disposable income. However, it reduces national saving because the government needs to borrow more to finance its unchanged level of spending, leading to a decrease in the overall savings available in the economy.

Question 2

Under capital budgeting, all of the following transactions would affect the federal budget deficit except the federal government's:

Accepted Answer

Selling a highway to the Government of Ontario and using the proceeds to retire federal debt does not affect the federal budget deficit as it is a capital transaction, not an operational expense or revenue.

Question 3

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short-run effects will be:

Accepted Answer

The traditional view holds that cutting taxes without reducing government spending increases disposable income, leading to higher consumer spending. This boosts economic activity, resulting in higher output and lower unemployment in the short run.

Question 4

The logic of Ricardian equivalence implies that:

Accepted Answer

The answer of The logic of Ricardian equivalence implies that:
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Question 5

The cyclically adjusted budget deficit:

Accepted Answer

The cyclically adjusted budget deficit estimates what the deficit would be if the economy were operating at the natural rate of output, taking into account economic cycles and fluctuations in output. It helps policymakers assess the impact of fiscal policy on the economy and address potential issues that may arise from deficits during different phases of the business cycle.

Question 6

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the long-run effects will be _____ steady-state capital and _____ consumption.

Accepted Answer

According to the traditional view of government debt, cutting taxes without reducing government spending leads to an increase in government borrowing. This borrowing competes with private sector investment, potentially crowding it out, which can lead to lower steady-state capital. Lower capital, in turn, can lead to lower consumption in the long run as the economy's productive capacity is diminished.

Question 7

Government tax policy can affect aggregate supply as well as aggregate demand because changes in taxes change the:

Accepted Answer

Changes in taxes can directly affect incentives to work and invest, leading to changes in productivity and, therefore, aggregate supply. Additionally, changes in taxes can indirectly affect aggregate demand through changes in disposable income, consumption, and investment. Therefore, option C is the best choice.

Question 8

Ricardian equivalence refers to the same impact of financing government:

Accepted Answer

Ricardian equivalence states that financing government through debt or taxes has the same impact in the long run, as individuals anticipate that any increase in government spending will eventually have to be paid for through higher taxes, leading them to save more and spend less in anticipation of those future tax increases. Therefore, the method of financing (debt or taxes) does not matter in terms of its impact on the economy in the long run.

Question 9

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in Canada this situation will lead to _____ net indebtedness on the part of Canada to foreign countries and _____ net exports.

Accepted Answer

Cutting taxes without reducing government spending increases the budget deficit, leading to more borrowing from foreign countries, thus increasing net indebtedness. This can result in a stronger currency, making exports more expensive and reducing net exports.

Question 10

According to the traditional view of government debt (as in the IS-LM model), if taxes are cut without cutting government spending, then in the short run interest rates will _____, and investment will ______.

Accepted Answer

When taxes are cut without cutting government spending, it increases the deficit, which in turn increases the demand for loans, leading to higher interest rates. This increase in interest rates makes investment more expensive, decreasing investment. Therefore, in the short run, interest rates will increase and investment will decrease.

Question 11

According to the traditional view of government debt (as in the Mundell-Fleming model), if taxes are cut without cutting government spending, then the short-run effects are a(n) _____ of the dollar and a(n) _____ in net exports.

Accepted Answer

According to the traditional view of government debt in the Mundell-Fleming model, if taxes are cut without cutting government spending, this will lead to an increase in the budget deficit. As a result, the demand for loanable funds will increase, leading to an increase in interest rates. This increase in interest rates will cause an appreciation of the domestic currency, as foreigners will want to invest in the country to take advantage of the higher interest rates. However, the appreciation of the currency will make exports more expensive, leading to a decrease in net exports. Therefore, the short-run effects are an appreciation of the dollar and a decrease in net exports. Choice B is the correct answer.

Question 12

The debt of the Canadian government is underreported in the view of many economists because all of the following liabilities are excluded except:

Accepted Answer

Debt owed to foreigners is typically included in the reported government debt figures, whereas future obligations like pensions and guarantees are often excluded.

Question 13

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as _____, so their consumption will _____.

Accepted Answer

According to the theory of Ricardian equivalence, if consumers believe that a tax cut today will result in an increase in future taxes to pay for the current deficit spending, they will increase their savings instead of spending more. Therefore, the additional disposable income that they receive today will be offset by the expectation of higher taxes in the future. This means that their consumption will remain unchanged, and they will instead save more to prepare for the future tax increase. Therefore, option D is the correct answer.

Question 14

Each of the following changes would allow the measured budget deficit to provide a truer picture of fiscal policy except:

Accepted Answer

Excluding some liabilities altogether would not provide a truer picture of fiscal policy, as it would ignore certain financial obligations, potentially misrepresenting the government's fiscal position. Correcting for inflation, offsetting changes in liabilities with assets, and adjusting for the business cycle all contribute to a more accurate reflection of fiscal policy by accounting for external factors and the government's comprehensive financial activities.

Question 15

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending _____ public saving and _____ private saving.

Accepted Answer

Ricardian equivalence suggests that when the government cuts taxes without reducing spending, individuals anticipate future taxes to pay off the government's debt. As a result, they increase their savings to prepare for these future taxes, leading to an increase in private saving. However, since the government is not reducing spending, its need for funds remains the same, leading to a reduction in public saving.

Question 16

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital _____ and a trade _____.

Accepted Answer

According to the traditional view of government debt, if taxes are cut without cutting government spending, it will increase the budget deficit. This will lead to increased borrowing by the government, which will attract foreign capital inflows. Therefore, the international effect initially will be a capital inflow. Due to the increase in imports resulting from increased consumption (as a result of the tax cut), the trade balance will deteriorate, resulting in a trade deficit.

Question 17

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate large enough:

Accepted Answer

According to supply siders, tax cuts can raise total tax revenue if they generate an increase in aggregate supply. This occurs because the lower tax rates encourage individuals and businesses to work harder, invest more, and produce more. As a result, this can lead to higher economic growth and ultimately higher tax revenue, even with the lower rates. Conversely, if the tax cuts generate a decrease in aggregate supply, revenue will decrease. Decreases in the money supply are not considered as significant factors in the supply side theory of taxation.

Question 18

The amount the government would owe if a borrower were to default on a government-guaranteed loan is an example of:

Accepted Answer

A contingent liability is a potential liability that may or may not occur, depending on the outcome of a future event. In this case, the government's obligation to pay if a borrower defaults on a guaranteed loan is a contingent liability because it only becomes a liability if the borrower defaults. This is different from capital budgeting, which involves making long-term investment decisions, cyclically adjusted liabilities, which are liabilities that fluctuate with the business cycle, and Ricardian equivalence, which is a theory about the effect of government deficits on private savings.

Question 19

Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to:

Accepted Answer

When the economy enters a recession, tax revenue decreases as people earn less money and the government receives less revenue from corporate taxes. At the same time, government spending on programs like unemployment benefits and stimulus measures increases. This results in a budget deficit, meaning that the government is spending more money than it is taking in.

Question 20

Cyclically adjusted budgets are useful because they:

Accepted Answer

Cyclically adjusted budgets are designed to reflect the long-term sustainability of fiscal policy decisions, regardless of current economic conditions. They aim to remove the impact of cyclical economic changes on fiscal deficits, providing a more accurate picture of underlying fiscal policy. Therefore, choice B is the correct answer. Choices A, C, and D do not accurately reflect the purpose of cyclically adjusted budgets.

Quiz 17: Government Debt and Budget Deficits

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending:

Under capital budgeting, all of the following transactions would affect the federal budget deficit except the federal government's:

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short-run effects will be:

The logic of Ricardian equivalence implies that:

The cyclically adjusted budget deficit:

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the long-run effects will be _ steady-state capital and _ consumption.

Government tax policy can affect aggregate supply as well as aggregate demand because changes in taxes change the:

Ricardian equivalence refers to the same impact of financing government:

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in Canada this situation will lead to _ net indebtedness on the part of Canada to foreign countries and _ net exports.

According to the traditional view of government debt (as in the IS-LM model) , if taxes are cut without cutting government spending, then in the short run interest rates will _, and investment will __.

According to the traditional view of government debt (as in the Mundell-Fleming model) , if taxes are cut without cutting government spending, then the short-run effects are a(n) _ of the dollar and a(n) _ in net exports.

The debt of the Canadian government is underreported in the view of many economists because all of the following liabilities are excluded except:

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as _, so their consumption will _.

Each of the following changes would allow the measured budget deficit to provide a truer picture of fiscal policy except:

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending _ public saving and _ private saving.

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital _ and a trade _.

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate large enough:

The amount the government would owe if a borrower were to default on a government-guaranteed loan is an example of:

Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to:

Cyclically adjusted budgets are useful because they:

Quiz 17: Government Debt and Budget Deficits

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending:

Under capital budgeting, all of the following transactions would affect the federal budget deficit except the federal government's:

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short-run effects will be:

The logic of Ricardian equivalence implies that:

The cyclically adjusted budget deficit:

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the long-run effects will be _____ steady-state capital and _____ consumption.

Government tax policy can affect aggregate supply as well as aggregate demand because changes in taxes change the:

Ricardian equivalence refers to the same impact of financing government:

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in Canada this situation will lead to _____ net indebtedness on the part of Canada to foreign countries and _____ net exports.

According to the traditional view of government debt (as in the IS-LM model) , if taxes are cut without cutting government spending, then in the short run interest rates will _____, and investment will ______.

According to the traditional view of government debt (as in the Mundell-Fleming model) , if taxes are cut without cutting government spending, then the short-run effects are a(n) _____ of the dollar and a(n) _____ in net exports.

The debt of the Canadian government is underreported in the view of many economists because all of the following liabilities are excluded except:

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as _____, so their consumption will _____.

Each of the following changes would allow the measured budget deficit to provide a truer picture of fiscal policy except:

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending _____ public saving and _____ private saving.

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital _____ and a trade _____.

According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate large enough:

The amount the government would owe if a borrower were to default on a government-guaranteed loan is an example of:

Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to:

Cyclically adjusted budgets are useful because they:

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the long-run effects will be _ steady-state capital and _ consumption.

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in Canada this situation will lead to _ net indebtedness on the part of Canada to foreign countries and _ net exports.

According to the traditional view of government debt (as in the IS-LM model) , if taxes are cut without cutting government spending, then in the short run interest rates will _, and investment will __.

According to the traditional view of government debt (as in the Mundell-Fleming model) , if taxes are cut without cutting government spending, then the short-run effects are a(n) _ of the dollar and a(n) _ in net exports.

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as _, so their consumption will _.

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending _ public saving and _ private saving.

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital _ and a trade _.