Question 1

A change in government tax policy that increases government tax collections

Accepted Answer

An increase in government tax collections typically reduces disposable income, leading to a decrease in consumption and investment. This results in a leftward shift of the IS curve, as it represents a decrease in goods market equilibrium at any given interest rate. The LM curve, which represents money market equilibrium, is not directly affected by changes in tax policy.

Question 2

The right measure of fiscal policy is

Accepted Answer

The full-employment or cyclically-adjusted deficit or surplus is considered the right measure of fiscal policy because it accounts for the economic cycle's effects on government finances, providing a clearer picture of the government's underlying fiscal position.

Question 3

An increase in the full-employment deficit

Accepted Answer

An increase in the full-employment deficit shifts the Marginal Propensity to Raise Funds (MPRF) curve to the left, indicating a higher cost or reduced willingness to finance additional government spending or tax cuts.

Question 4

An increase in the full-employment deficit

Accepted Answer

An increase in the full-employment deficit, which implies an increase in government spending or a decrease in taxes while the economy is at full employment, leads to an increase in aggregate demand. This is represented in the IS-LM model by a rightward shift of the IS curve, as it reflects higher demand for goods and services at any given interest rate.

Question 5

If the Federal Reserve tightens monetary policy so that real interest rates increase and real GDP decreases,

Accepted Answer

When the Federal Reserve tightens monetary policy, leading to higher real interest rates and lower real GDP, economic activity slows down. This slowdown results in lower tax revenues because individuals and businesses earn less and thus pay less in taxes. Consequently, the government's cash deficit increases due to reduced tax revenues. However, the full-employment budget balance, which is a theoretical measure of what the government's budget would be if the economy were operating at full employment, does not change directly due to monetary policy actions. It is more influenced by fiscal policy changes and long-term economic conditions.

Question 6

To turn the cash budget into the full-employment budget,

Accepted Answer

The full-employment budget involves adjusting the budget deficit or surplus to account for the automatic changes in taxes and government spending that occur as a result of the business cycle. This adjustment helps to isolate the discretionary fiscal policy effects from the automatic fiscal responses to economic changes.

Question 7

When real GDP decreases and unemployment increases

Accepted Answer

When real GDP decreases and unemployment increases, tax revenue tends to decrease because there are fewer transactions and earnings to tax. At the same time, social welfare spending increases because more people are eligible for unemployment benefits and other forms of government assistance. This combination swings the cash budget toward a deficit, as government expenditures increase while revenues decrease.

Question 8

When real GDP increases and unemployment decreases

Accepted Answer

When real GDP increases, it typically leads to higher income and profits, which increase tax revenue. At the same time, lower unemployment means fewer people need social welfare benefits, leading to decreased social welfare spending. Both of these effects swing the cash budget toward surplus.

Question 9

Each of the following are further adjustments that need to be made to the reported cash budget level except

Accepted Answer

The answer of Each of the following are further adjustments...

Question 10

The real interest that government pays on its debt

Accepted Answer

The real interest that government pays on its debt is equal to the real interest rate times the debt (r x D), as this accounts for the actual cost of borrowing after adjusting for inflation.

Question 11

The real deficit (d^r)

Accepted Answer

The real deficit accounts for the effect of inflation on the debt, which is calculated as the cash deficit minus the inflation rate times the debt.

Question 12

Economists suggest that governments should adopt capital budgeting because

Accepted Answer

Capital budgeting allows for the cost of capital goods to be spread over their useful life, providing a more accurate reflection of their value and impact on the budget over time.

Question 13

Fiscal policy is sustainable if

Accepted Answer

Fiscal policy is considered sustainable if the debt-to-GDP ratio is stable or heading towards a steady state. This indicates that a country's debt level is manageable relative to the size of its economy, ensuring long-term economic stability.

Question 14

In an economy with a constant cash deficit d, a long-run inflation rate , and long-run real GDP growth rate n + g, the equilibrium debt-to-GDP ratio is

Accepted Answer

The equilibrium debt-to-GDP ratio in an economy with a constant cash deficit d, a long-run inflation rate $\pi$, and long-run real GDP growth rate $n + g$ is given by the formula $(d/Y) /(n + g + \pi)$. This formula accounts for the effects of growth and inflation on the ability of an economy to manage its debt relative to its GDP.

Question 15

In an economy with a constant cash deficit of 3 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

Accepted Answer

The equilibrium debt-to-GDP ratio can be calculated using the formula for the sustainable debt-to-GDP ratio: $ \frac{Deficit}{Growth Rate} $. Here, the growth rate is the sum of the inflation rate, labor force growth rate, and growth rate of output per worker, which is $2\% + 2\% + 1\% = 5\%$. The constant cash deficit is 3% of GDP. Therefore, the equilibrium debt-to-GDP ratio is $ \frac{3\%}{5\%} = \frac{3}{5} $.

Question 16

In an economy with a constant cash deficit of 4 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

Accepted Answer

The equilibrium debt-to-GDP ratio is determined by the deficit-to-GDP ratio divided by the growth rate of nominal GDP. The nominal GDP growth rate is the sum of the inflation rate, labor force growth rate, and growth rate of output per worker, which is 2% + 2% + 1% = 5%. Therefore, the equilibrium debt-to-GDP ratio is 4% / 5% = 4/5.

Question 17

If the cash deficit-to-GDP ratio increases,

Accepted Answer

An increase in the cash deficit-to-GDP ratio implies that the government is borrowing more relative to the size of the economy. This leads to an increase in the total amount of debt relative to GDP, hence increasing the equilibrium debt-to-GDP ratio.

Question 18

If the labor force growth rate increases,

Accepted Answer

An increase in the labor force growth rate can lead to higher economic growth, which can increase GDP. If GDP grows faster than debt, the debt-to-GDP ratio will decrease.

Question 19

If the cash deficit-to-GDP ratio decreases,

Accepted Answer

A decrease in the cash deficit-to-GDP ratio implies that the government is either increasing its revenue or decreasing its expenditures relative to the size of the economy. This leads to a lower need for borrowing, hence, the equilibrium debt-to-GDP ratio will decrease as the government accumulates less debt relative to the size of the economy.

Question 20

If the labor force growth rate decreases,

Accepted Answer

A decrease in the labor force growth rate can lead to a decrease in economic growth, potentially increasing the equilibrium debt-to-GDP ratio as government revenues may fall while spending may not adjust as quickly.

Quiz 14: Budget Balance, National Debt, and Investment

A change in government tax policy that increases government tax collections

The right measure of fiscal policy is

An increase in the full-employment deficit

An increase in the full-employment deficit

If the Federal Reserve tightens monetary policy so that real interest rates increase and real GDP decreases,

To turn the cash budget into the full-employment budget,

When real GDP decreases and unemployment increases

When real GDP increases and unemployment decreases

Each of the following are further adjustments that need to be made to the reported cash budget level except

The real interest that government pays on its debt

The real deficit (dr)

Economists suggest that governments should adopt capital budgeting because

Fiscal policy is sustainable if

In an economy with a constant cash deficit d, a long-run inflation rate , and long-run real GDP growth rate n + g, the equilibrium debt-to-GDP ratio is

In an economy with a constant cash deficit of 3 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

In an economy with a constant cash deficit of 4 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

If the cash deficit-to-GDP ratio increases,

If the labor force growth rate increases,

If the cash deficit-to-GDP ratio decreases,

If the labor force growth rate decreases,

The real deficit (d^r)