Question 1

Which of the following is a valid concern about the national debt for a country whose debt is held entirely by its citizens?

Accepted Answer

If the national debt reduces private expenditures on capital formation, future generations may inherit a smaller stock of capital, which ultimately leads to lower incomes. This is a valid concern for a country whose debt is held entirely by its citizens. Option A is also a valid concern, but it does not apply to a country whose debt is held only by its citizens, as their future welfare is directly related to their own debt holdings. Option B and C are invalid concerns if the debt is held by its citizens, as the government will not go bankrupt, and the citizens themselves will have to pay off the debt, so it cannot be "unpaid."

Question 2

Given the underlying demographic changes in our society, we can expect

Accepted Answer

As our society ages and the population shifts towards older individuals, there will be increased pressure on government programs such as Social Security and Medicare. This, coupled with the fact that older individuals typically pay less in taxes than younger individuals, means that budget deficits are likely to become more common in the years ahead.

Question 3

Inclusion of the Social Security Trust Fund in the overall budget calculation

Accepted Answer

Including the Social Security Trust Fund in the overall budget calculation reduces the reported size of the budget deficit because the Social Security system is currently running a surplus. This surplus offsets some of the deficit in other parts of the budget, resulting in a smaller overall deficit.

Question 4

What is the difference between the federal budget deficit and the national debt?

Accepted Answer

The answer of What is the difference between the federal...

Question 5

According to the traditional (crowding-out) view, which of the following is most likely to result if a substantial portion of government expenditures is financed by borrowing rather than taxation?

Accepted Answer

According to the traditional view of crowding-out, borrowing by the government to finance expenditures will increase demand for credit, leading to higher interest rates. Higher interest rates will make it more expensive for firms to finance investment projects, leading to a reduction in private domestic investment. Option A is incorrect because borrowing would lead to an increase in demand for credit, making it less likely that saving would increase. Option B is incorrect because borrowing by the government would not necessarily lead to an outflow of foreign capital. Option D is incorrect because borrowing would lead to an increase in demand for credit, making it more likely that foreign investment would be crowded out.

Question 6

Indicate what might be done to restrain the tendency of the democratic process to generate budget deficits?

Accepted Answer

The answer of Indicate what might be done to restrain...

Question 7

External debt is that portion of the national debt

Accepted Answer

External debt refers to the portion of the national debt that is owed to investors outside of the United States. This includes foreign governments, banks, and individuals who have invested in U.S. treasury securities.

Question 8

Currently, the Social Security trust fund is running a

Accepted Answer

The Social Security trust fund is running a surplus, which reduces the apparent size of the budget deficit. This is because the surplus from Social Security is used to offset other government spending, making the overall budget deficit appear smaller.

Question 9

Which country had the lowest government debt as a percent of GDP in 2009?

Accepted Answer

According to data from the World Bank, in 2009, Australia had the lowest government debt as a percent of GDP at 12.7%. The United States had a debt to GDP ratio of 83.4%, Spain had 55.3%, and the United Kingdom had 68.2%.

Question 10

If the revenues and expenditures of the Social Security trust fund were not included when calculating the budget deficit, the recalculated deficit would

Accepted Answer

The trust fund's revenues and expenditures are currently included in the federal budget, so excluding them from the deficit calculation would make the deficit seem smaller than it actually is. Therefore, if they were not included, the recalculated deficit would be larger.

Question 11

Which of the following is true concerning the national debt?

Accepted Answer

A budget surplus will reduce the national debt because it means the government is bringing in more revenue than it is spending, allowing for the excess to be used to pay off previous debt. Option A is incorrect as the national debt is the total amount of debt owed by the government, not just for one year. Option B is incorrect as the deficit and debt are two separate concepts. Option C is incorrect as a budget deficit means the government is spending more than it is bringing in, thus increasing the national debt.

Question 12

The "implicit debt" accompanying the Social Security and Medicare programs is

Accepted Answer

The implicit debt accompanying the Social Security and Medicare programs is the present value of their unfunded liabilities, which is estimated to be over $100 trillion, while the national debt is currently over $27 trillion. Therefore, the implicit debt is substantially greater than the national debt.

Question 13

If a budget deficit as a percent of GDP is greater than the growth of real output, the national debt will

Accepted Answer

A budget deficit as a percent of GDP greater than the growth of real output means that the debt is increasing faster than the economy is growing. Therefore, the national debt will increase relative to the size of the economy.

Question 14

Many people assert that the national debt is not a problem because "we owe it to ourselves." Is this true?

Accepted Answer

The answer of Many people assert that the national debt...

Question 15

According to the traditional (crowding-out) view, what impact do budget deficits have on the economy?

Accepted Answer

The answer of According to the traditional (crowding-out) view, what...

Question 16

If the U.S. government were to run a substantial budget deficit, what would be the effects on the economy under the new classical view?

Accepted Answer

The answer of If the U.S. government were to run...

Question 17

According to the traditional (crowding-out) view, budget deficits will

Accepted Answer

According to the traditional (crowding-out) view, when the government runs a budget deficit, it needs to borrow money by selling bonds to the public. This increases the demand for loanable funds, which in turn drives up interest rates. As a result, private investment is likely to be discouraged, as individuals and firms find it more expensive to borrow money. Therefore, the correct answer is B, which states that budget deficits will increase interest rates and retard private investment.

Special Topic 8 : The Federal Budget and the National Debt