Question 1

What will happen if a country uses money creation to finance a large and expanding national debt?

Accepted Answer

Using money creation to finance a large and expanding national debt can lead to an increase in the money supply, which will eventually result in inflation. As more money is injected into the economy, the demand for goods and services increases, and this can lead to higher prices, wage increases, and a general rise in the overall cost of living. Consequently, the rate of inflation will rise. Real output and employment may not necessarily grow rapidly as this will depend on various other factors such as the efficiency of resource allocation, technological progress, and other economic policies. Nominal interest rates may fall temporarily due to the increase in the money supply, but this may be short-lived as investors may require higher rates to compensate for the inflation risk, and this will eventually lead to higher real interest rates. The foreign exchange value of the currency may increase temporarily due to the inflows of foreign capital attracted by the low-interest rates, but this may cause the currency to become overvalued and lead to a slowdown in exports, which may negatively impact the economy in the long run.

Question 2

Which of the following is likely to push the federal debt increasingly higher in the coming decades?

Accepted Answer

The Social Security and Medicare programs are projected to face significant demographic and cost pressures in the coming decades due to the aging of the baby boomer generation, which is likely to increase federal expenditures and thus raise the federal debt. The other options are unlikely to have a significant impact on the federal debt in the long term.

Question 3

When is debt financing most likely to harm future generations of Americans?

Accepted Answer

When foreign investors hold the debt and the funds are used to finance current consumption or unproductive investments, this can harm future generations because it increases the debt burden without providing any tangible benefits or productive assets to offset it. Additionally, if the debt is held by foreign investors, interest payments and principal repayments must be made to those investors, draining resources that could be used for other purposes domestically.

Question 4

A government with a national debt that is large and growing relative to the size of the economy will

Accepted Answer

As the national debt grows larger relative to the size of the economy, the creditworthiness of the government will be questioned by lenders, causing difficulty in borrowing in global credit markets. Furthermore, the government will have to allocate a larger portion of tax revenue to the payment of interest on the outstanding debt, which will limit the amount of funds available for other government priorities.

Question 5

Which of the following best explains the political attractiveness of debt financing relative to taxation?

Accepted Answer

Debt financing allows politicians to spend money now and push the visible cost of government into the future, making it more politically attractive than taxation which immediately exposes the cost of government programs.

Question 6

As conventionally measured, budget deficit and surplus calculations include the revenues and expenditures of

Accepted Answer

As conventionally measured, budget deficit and surplus calculations include the revenues and expenditures of all government trust funds, including Social Security.

Question 7

Among the major industrial economies, which of the following had the largest net public debt as a percent of GDP in 2011?

Accepted Answer

According to data from the OECD, Greece had the largest net public debt as a percent of GDP in 2011, with a debt-to-GDP ratio of over 170%. The United States, United Kingdom, and Australia had debt-to-GDP ratios of approximately 100%, 80%, and 25%, respectively.

Question 8

Since 1960, there have been how many years of budget surplus?

Accepted Answer

According to the given information, there is no indication of any years of budget surplus since 1960 except for the option A) 5.

Question 9

Sizeable budget deficits can be expected in the years ahead because

Accepted Answer

The statement in option A is true as the retirement of the baby boom generation will lead to an increase in expenditures on Social Security and Medicare. The statement in option B is also true as politicians have an incentive to spend more revenue than they are willing to tax. Therefore, both options A and B are true, and the best choice is C. Option D is incorrect as it contradicts option A, which is a true statement.

Question 10

The large budget deficits of 2001-2011 were

Accepted Answer

The increase in consumption as a share of GDP indicates that the current generation of Americans is gaining at the expense of future generations. This is because the deficits were financed through borrowing, which means that the current generation is consuming more than it is producing and shifting the burden of repayment onto future generations.

Question 11

Currently, the strategy of the Social Security system is to run surpluses to prepare for the retirement of the baby boom generation. The effectiveness of this strategy is being undermined because

Accepted Answer

The trust fund is being used to finance current government expenditures, and the bonds held by the trust fund are an obligation of the U.S. Treasury. This means that the surplus is not being saved for future retirees, but rather used to finance current government spending. This undermines the effectiveness of the strategy to prepare for the retirement of the baby boom generation.

Question 12

When a nation has a high debt/GDP ratio, that nation generally will

Accepted Answer

When a nation has a high debt/GDP ratio, it means that the country owes a large amount of money compared to its overall economic output. This indicates that the country has been borrowing heavily and may require high taxes just to pay the interest on the debt. This can lead to reduced spending on other important areas such as education, healthcare, and infrastructure. As a result, it can negatively affect the overall economic growth and development of the nation.

Question 13

If a country with a large government debt uses money creation to service and repay the debt, this will lead to

Accepted Answer

Using money creation to service and repay government debt will lead to inflation, higher interest rates, and a financial crisis. Inflation occurs because the government is effectively increasing the money supply, which can lead to a decrease in the value of the currency. Higher interest rates occur as a result of the increased money supply, which makes it more expensive to borrow money. A financial crisis may occur as a result of these factors, combined with the unsustainable level of government debt, which can cause a loss of confidence in the economy and a reduction in investment and economic activity.

Question 14

Among the major industrial economies, which of the following had the lowest net public debt as a percent of GDP in 2011?

Accepted Answer

According to data from the Organization for Economic Cooperation and Development (OECD), Australia had the lowest net public debt as a percent of GDP in 2011 among the given countries.

Question 15

As baby-boomers reach retirement age and draw on Social Security and Medicare,

Accepted Answer

As baby-boomers retire and draw on Social Security and Medicare, expenditures on these programs will increase, which will in turn increase the size of the federal debt. The Social Security Trust Fund may still run a deficit, and unfunded promises may still exist in the federal budget, but the primary effect will be an increase in the federal debt as a share of GDP.

Question 16

If the federal government fails to reduce the nation's debt relative to income,

Accepted Answer

If the federal government fails to reduce the nation's debt relative to income, the interest expenses on the outstanding debt will increase. This is because lenders will demand higher interest rates to compensate for the increased risk of lending to a country with high debt levels, making it more expensive for the government to borrow money.

Question 17

Public choice analysis explains that

Accepted Answer

Public choice analysis argues that politicians have strong incentives to favor deficit finance over tax finance because deficit spending allows them to spend more money without the immediate cost of raising taxes. Therefore, they can potentially win more votes by implementing popular policies while postponing the costs until later.

Question 18

When the United States ran large budget deficits during 2001-2011,

Accepted Answer

When the United States ran large budget deficits during 2001-2011, private investment was weak and consumption increased as a share of GDP. This indicates that the deficits were being financed by increased borrowing and spending by consumers, rather than by strong private investment or reduced borrowing from foreign sources.

Question 19

Widespread acceptance of the Keynesian theory of fiscal policy

Accepted Answer

The widespread acceptance of Keynesian theory of fiscal policy relaxed the political pressure to balance the budget and paved the way for persistent budget deficits. Keynesian theory suggested that deficit spending during recessions can help stabilize the economy. Thus, it became more acceptable to have budget deficits as part of an economic stabilization policy.

Question 20

As the size of a nation's outstanding debt gets larger and larger relative to the size of the economy,

Accepted Answer

All of the given statements are correct. As the size of a nation's outstanding debt increases relative to the size of the economy, it becomes difficult to borrow in global credit markets as investors become increasingly cautious. In order to attract investors, the country has to pay higher real interest rates. Eventually, at some point, the country will have to bring spending into line with revenues to maintain the confidence of investors. Therefore, option D is correct.

Special Topic 8 : The Federal Budget and the National Debt