Question 1

The concept of "national saving" refers to the

Accepted Answer

National saving refers to the sum of private saving and government saving. It represents the amount of funds that are available for investment in a country's economy. Private saving refers to the income that households have left over after consumption expenses, while government saving represents the difference between government revenue and expenditures. Together, these two forms of saving contribute to a country's overall saving rate and affect economic growth and stability.

Question 2

Suppose the change in the government's debt-to-GDP ratio in a given year is -0.018.This figure tells us that the government's debt-to-GDP ratio has

Accepted Answer

The given figure of -0.018 indicates a decrease or a fall in the government's debt-to-GDP ratio. Since it is a ratio, it is measured in percentage points rather than percentages. Therefore, the correct interpretation is that the government's debt-to-GDP ratio has fallen by 1.8 percentage points (0.018 x 100 = 1.8).

Question 3

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3%
- growth rate of real GDP = 3%
- current debt-to-GDP ratio = 25%
- primary budget surplus as a percentage of GDP = 2%
Over this one-year period the debt-to-GDP ratio will have

Accepted Answer

The answer of Consider the following data about government debt...

Question 4

Consider a closed-economy AD/AS macro model.A policy-induced increase in the government's budget deficit is most likely to crowd-out private investment if

Accepted Answer

An increase in government deficit can lead to an increase in demand for loanable funds, which shifts the demand curve for loanable funds to the right. This increase in demand for loanable funds raises interest rates, which can crowd out private investment. Therefore, if interest rates rise sharply as a result of the deficit, private investment is more likely to be crowded out.

Question 5

Suppose that the real rate of interest is 3% and the growth rate of real GDP is 1%.If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant at its current level,then it

Accepted Answer

If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant, it means that the government needs to avoid increasing the debt over time relative to the size of the economy. To do this, the government needs to ensure that the present value of its primary surpluses (i.e. the government’s revenues minus non-interest expenses) is at least equal to the present value of its interest payments on the debt.

In this case, if the real interest rate is 3% and the growth rate of real GDP is 1%, the nominal GDP growth rate would be 4%. Therefore, if the government wants to keep the debt-to-GDP ratio constant, it needs to ensure that its primary budget surplus is at least 4% of GDP (which equals the nominal interest rate on the debt of 3% plus the growth rate of nominal GDP of 4% multiplied by the debt-to-GDP ratio). In other words, the government needs to run a primary budget surplus of at least 1% of GDP (4% - 3%).

Question 6

Consider a government with an outstanding stock of public debt.If,in any given year,the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP,then

Accepted Answer

A primary budget surplus means that the government's revenue is higher than its non-interest spending. If the real interest rate on government bonds (i.e. the cost of servicing debt) is less than the growth rate of real GDP, it means that the economy is growing faster than the interest payments on the debt. This implies that the debt-to-GDP ratio will fall, as the government's debt burden becomes smaller relative to the size of the economy. Therefore, the correct choice is D.

Question 7

In an open economy like Canada's,a fiscal expansion by the government tends to

Accepted Answer

In an open economy, a fiscal expansion often leads to higher interest rates as the government borrows more. This attracts foreign capital, appreciating the currency. A stronger currency makes exports more expensive and imports cheaper, which tends to reduce net exports. This process does not necessarily encourage private investment directly; rather, the increased demand for the domestic currency and the subsequent appreciation can crowd out net exports by making them less competitive internationally.

Question 8

An illustration of "crowding out" in macroeconomics is best provided by

Accepted Answer

Crowding out refers to the phenomenon where increased government spending or borrowing leads to a decrease in private spending or borrowing. In this case, a fiscal expansion (increased government spending) leads to higher interest rates, which then leads to lower private investment. This is an illustration of crowding out in macroeconomics.

Question 9

Consider a closed-economy AD/AS macro model.An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ private investment.

Accepted Answer

An expansionary fiscal policy typically involves increased government spending or tax cuts, leading to a higher budget deficit. This can increase demand for loanable funds, raising interest rates and crowding out private investment.

Question 10

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3%
- growth rate of real GDP = 1%
- current debt-to-GDP ratio = 40%
- primary budget deficit as a percentage of GDP = 2%
Over this one-year period the debt-to-GDP ratio will have risen by

Accepted Answer

The formula to calculate the change in debt-to-GDP ratio is (interest rate on government bonds - growth rate of real GDP) x current debt-to-GDP ratio + primary budget deficit. Substituting the given values, we get (0.03 - 0.01) x 0.4 + 0.02 = 0.028 or 2.8 percentage points. Therefore, the correct answer is D.

Question 11

Suppose the government's debt-to-GDP ratio on January 1 of Year 1 is 32%.The change in the debt-to-GDP ratio during Year 1 is -0.037.On January 1 of Year 2 the government's debt-to-GDP ratio is

Accepted Answer

The answer of Suppose the government's debt-to-GDP ratio on January...

Question 12

Consider a closed-economy AD/AS model.If an increase in the government's budget deficit drives up market interest rates,

Accepted Answer

An increase in the government's budget deficit means the government is borrowing more money, which increases the demand for loanable funds and drives up interest rates. When interest rates increase, some private investment expenditure (such as business investment) would become less attractive, leading to the crowding out effect. Therefore, D is the best choice.

Question 13

In an open economy with internationally mobile financial capital,we would expect a policy-induced increase in the government's budget deficit to crowd out

Accepted Answer

In an open economy with mobile financial capital, an increase in the government's budget deficit can lead to higher interest rates, which would attract foreign investment and increase demand for the country's currency. This, in turn, could cause the country's currency to appreciate, making exports more expensive and less competitive in the global market. As a result, net exports would be crowded out more than investment.

Question 14

Consider an open-economy AD/AS macro model.An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ net exports.

Accepted Answer

Expansionary fiscal policy typically increases government spending or decreases taxes, leading to a higher budget deficit. It can also cause the domestic currency to appreciate due to higher interest rates attracting foreign capital, which tends to decrease net exports as domestic goods become more expensive for foreigners.

Question 15

Suppose the government's objective is to hold its debt-to-GDP ratio constant at its current level of 30%.If the real interest rate on government bonds is 4% and the growth rate of real GDP is 2%,the government must

Accepted Answer

To hold the debt-to-GDP ratio constant at 30%, the primary budget balance (the government's budget balance excluding interest payments on the debt) must equal:

(real interest rate on government bonds) x (government debt/GDP)

= 0.04 x 0.3

= 0.012, or 1.2% of GDP

Therefore, the government must run a primary budget surplus of 0.6% of GDP (half of 1.2%) to keep the debt-to-GDP ratio constant, since the real GDP growth rate is 2%.

The overall budget balance (which includes interest payments on the debt) must be:

(primary budget balance) + (interest payments on the debt)

= 0.6% of GDP + (0.04 x 0.3) = 0.72% of GDP

This means that the government must run an overall budget surplus of 0.72% of GDP - any surplus larger than this will help to reduce the debt-to-GDP ratio, and any deficit will cause the ratio to increase.

Therefore, option D is the correct answer.

Question 16

Suppose the real rate of interest on government bonds is 4% and the growth rate of real GDP is 2%.If the government has a positive stock of outstanding debt and its policy objective is to hold the debt-to-GDP ratio constant at its current level,it must

Accepted Answer

To hold the debt-to-GDP ratio constant, the government must make sure that the growth rate of the debt is equal to the growth rate of the economy. Since the real interest rate on government bonds is 4% and the growth rate of real GDP is 2%, the government must run a primary budget surplus (a budget surplus excluding interest payments on the debt) of at least 2% of GDP to achieve this objective.

Question 17

In an open economy like Canada's,a policy-induced increase in the government's budget deficit tends to

Accepted Answer

An increase in the government's budget deficit will lead to an increase in demand for loanable funds, which will push up interest rates. This will attract foreign capital seeking higher returns, but at the same time, it will crowd out domestic investment and borrowing. In an open economy, this capital inflow will lead to an appreciation of the domestic currency, making net exports less competitive and therefore reducing net exports. Therefore, the correct answer is D (attract foreign capital and crowd out net exports).

Question 18

Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 2%
- growth rate of real GDP = 3%
- current debt-to-GDP ratio = 50%
- primary budget deficit = 0
Over this one-year period the debt-to-GDP ratio will have

Accepted Answer

The answer of Consider the following data about government debt...

Question 19

Consider a government with an outstanding stock of public debt.If,in any given year,the government has a primary budget surplus and the real interest rate on government bonds is more than the growth rate of real GDP,then

Accepted Answer

The answer of Consider a government with an outstanding stock...

Question 20

What economists call "government saving",or "public saving" is the same as the

Accepted Answer

Government saving or public saving is defined as the government's budget surplus, which is the difference between government revenue and government expenditure.

Quiz 31: Government Debt and Deficits