Question 1

Suppose that government purchases of goods and services increase by $200 and at the same time lump-sum taxes are increased by $200.(It is important to note that income tax rates do not change.)Which of the following is true?

Accepted Answer

The answer of Suppose that government purchases of goods and...

Question 2

If the functional finance approach to federal budgeting is used,the federal government's budget deficit should be zero.

Accepted Answer

The functional finance approach does not require the federal government's budget deficit to be zero. Instead, it focuses on achieving full employment and price stability through managing government spending and taxes. The deficit or surplus is seen as a result of achieving these goals, rather than a primary objective.

Question 3

In Keynes' philosophy of government budgets,

Accepted Answer

According to Keynes' philosophy of government budgets, deficits are appropriate during recessions. This is because during a recession, there is a decrease in aggregate demand which results in a decrease in economic activity. In order to stimulate economic activity and increase aggregate demand, the government should increase its spending, which may lead to temporary deficits. Once the economy recovers, the government can focus on reducing the deficit. Therefore, Keynes believed in using deficits as a short-term tool for economic stabilization.

Question 4

Biannual budgets have replaced the annual budget process for the federal government.

Accepted Answer

The annual budget process is still in place for the federal government. Biannual budgets have not replaced it.

Question 5

An annually budgeted budget can only be met if automatic stabilizers are effective.

Accepted Answer

An annually budgeted budget can be met with or without effective automatic stabilizers. While automatic stabilizers can soften the impact of economic fluctuations and help reduce deficits or surpluses, they are not the only factor affecting budget outcomes. Other factors such as discretionary fiscal policies, economic growth, and unexpected events can also influence budget outcomes.

Question 6

If the government increased defense spending by $1 million and laid off enough Justice Department employees to decrease the Department of Justice budget by $1 million,we would expect the net effect to be

Accepted Answer

The increase in defense spending and the decrease in Justice Department spending cancel each other out. Therefore, there is no net change in government spending and thus no change in the budget deficit.

Question 7

If for every dollar increase in farm subsidies the government decreased urban welfare payments by a dollar,we would expect the net effect to be

Accepted Answer

If for every dollar increase in farm subsidies the government decreased urban welfare payments by a dollar, there would be no change in the overall government spending, therefore no impact on the budget deficit. It is important to note that both farm subsidies and urban welfare payments are considered transfer payments and are included in the government's budget.

Question 8

One rationale for the sizable wartime deficits run by the U.S.government is that the alternative to defending the country from an aggressor may involve substantial long-term costs.

Accepted Answer

By defending the country from an aggressor, the U.S. government is ensuring the long-term security and economic stability of the country. The cost of not defending the country could include damage to infrastructure, loss of life and livelihoods, and long-term economic repercussions. Therefore, running deficits to fund defense efforts can be seen as a necessary investment in the country's future.

Question 9

The functional finance philosophy is based on the idea that balancing the federal budget is less important than using it to promote an economy operating to its potential.

Accepted Answer

Functional finance focuses on using government spending and taxation to stabilize the economy and promote maximum employment, rather than solely aiming to balance the budget.

Question 10

Which of the following has been advanced as a legitimate reason for federal budget deficits?

Accepted Answer

Both c and d are legitimate reasons for government budget deficits. Deficits can be used to finance capital projects, such as infrastructure investment that can have long-term economic benefits. Deficits can also help reduce the impact and duration of recessions through the automatic stabilizers, such as unemployment insurance and food stamps. Additionally, if the government had to fund all of its programs with tax revenues, many programs would likely not get funded due to political and economic constraints.

Question 11

Because of automatic stabilizers,government budget deficits are

Accepted Answer

Automatic stabilizers are government policies that automatically increase government spending and decrease taxes during a recession, and decrease government spending and increase taxes during an expansion. This means that during a contraction, government budget deficits will increase due to increased spending and decreased tax revenue, and during an expansion, government budget deficits will decrease due to decreased spending and increased tax revenue. Therefore, government budget deficits are smaller during expansions and larger during contractions.

Question 12

If government increased Social Security benefits and decreased the salaries of government workers by the same amount,we would expect the immediate effect to be

Accepted Answer

The answer of If government increased Social Security benefits and...

Question 13

In order for the government to increase spending,it must increase taxes to finance that spending.

Accepted Answer

The government can also finance its spending through borrowing, printing money, or a combination of both. However, these methods can have negative consequences such as inflation and increased national debt.

Question 14

Some economists argue that federal government capital projects,which offer benefits over a number of years,should be financed over a number of years and therefore involve deficit finance.

Accepted Answer

This is because federal government capital projects usually involve large sums of money that cannot be financed in one year's budget. Since the benefits of these projects are spread over multiple years, it makes sense to finance them over a number of years as well through deficit spending.

Question 15

If the U.S.government spent $20 million paying people to dig holes in 2005,and then spent $30 million paying the same people to fill the holes up again that same year,we would expect the net effect to be a(n)

Accepted Answer

The net effect of spending $20 million to dig holes and then $30 million to fill them up again would be an increase in the budget deficit as government purchases of goods and services increased by $50 million. This is because both actions involve direct government spending on services, totaling $50 million, not transfer payments or a partial increase based on the difference in spending.

Question 16

John Maynard Keynes is best known for advocating

Accepted Answer

John Maynard Keynes is best known for advocating deficit spending by the federal government during recessions. He believed that government intervention, through increased spending, could stimulate economic growth and reduce unemployment. This idea became known as Keynesian economics and had a significant impact on economic policy in many countries in the decades following his work.

Question 17

If a budget is cyclically balanced,the government should run a surplus when the economy experiences a contractionary gap.

Accepted Answer

If a budget is cyclically balanced, it means that over the course of the business cycle, the budget balances out without any specific government action. Therefore, there is no need for the government to intentionally run a surplus during a contractionary gap. In fact, during a contractionary gap, a deficit may be needed to stimulate the economy.

Question 18

The accepted philosophy on U.S.federal deficits prior to the Great Depression was that

Accepted Answer

The accepted philosophy on U.S. federal deficits prior to the Great Depression was that the budget should be annually balanced. This meant that the government should aim to have revenues equal to expenditures every year.

Question 19

The budget deficit tends to decline during periods of recession and to increase during periods of economic recovery.

Accepted Answer

The statement is actually the opposite of reality. During a recession, tax revenues decrease and government spending on safety net programs like unemployment insurance increase, leading to an increase in the budget deficit. During a period of economic growth, tax revenues increase and government spending on safety net programs decrease, leading to a decrease or even a surplus in the budget deficit.

Question 20

The federal budget deficit becomes __________ during recessions because __________.

Accepted Answer

During recessions, more people are likely to become unemployed or need government assistance, leading to an increase in transfer payments. At the same time, tax revenues typically decline as businesses and individuals earn less income. These two factors combined lead to a larger federal budget deficit during recessions.

Quiz 13: Federal Budgets and Public Policy

Suppose that government purchases of goods and services increase by $200 and at the same time lump-sum taxes are increased by $200.(It is important to note that income tax rates do not change.) Which of the following is true?