Question 1

If the interest rate is 10%,what is the present discounted value of receiving $100 now,$140 next year,and $200 two years from now?

Accepted Answer

To calculate the present discounted value, we need to use the formula:

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3

where PV is the present value, CF is the cash flow in each period, r is the interest rate.

Plugging in the values:

PV = 100/(1+0.1)^1 + 140/(1+0.1)^2 + 200/(1+0.1)^3
PV = 100/1.1 + 140/1.21 + 200/1.331
PV = 90.91 + 115.70 + 150.85
PV = $357.46

Therefore, the present discounted value of receiving $100 now, $140 next year, and $200 two years from now at 10% interest rate is $392.56 (rounded to the nearest cent). The correct answer is D.

Question 2

Suppose the federal government has to borrow money because it has budget deficits.What is the mechanism through which this borrowing might crowd out private borrowing and capital accumulation?

Accepted Answer

When the federal government has to borrow money, it increases the demand for loanable funds, which can drive up interest rates. As interest rates rise, private borrowers may be discouraged from borrowing, as it becomes more expensive to finance investments or purchases that require credit. This can also affect capital accumulation, as businesses may be less willing to invest in new equipment or expand production if the cost of financing those investments is higher.

Question 3

Suppose your state passes a law that adjusts spending,based on a preset formula,to offset cyclical changes in the economy.This is an example of:

Accepted Answer

Automatic stabilization refers to government policies, like automatic adjustments in taxes and spending, that automatically offset fluctuations in economic activity. In this scenario, the law adjusts spending based on a formula, which is an example of automatic stabilization. The other options, static scoring (A) and dynamic scoring (B), refer to methods of evaluating the economic impact of policies, and discretionary stabilization (D) refers to deliberate government action taken to stabilize the economy.

Question 4

The U.S.government uses:

Accepted Answer

The U.S. government uses only cash accounting, which means it records revenue and expenses when they are received or paid, rather than when they are incurred. This differs from capital accounting, which records expenses when they are incurred, even if they are not paid until a later date. While this method may not provide the most accurate picture of long-term financial health, it is a simpler method for tracking and reporting government finances.

Question 5

Which of the following must be TRUE if the price of college tuition has risen faster than the consumer price index in the past 20 years?

Accepted Answer

If the price of college tuition has risen faster than the consumer price index, it means that tuition costs have increased at a faster rate than general inflation. This would result in the real price of college tuition (adjusted for inflation) increasing over time. Therefore, choice A is the correct option. B, C, and D are incorrect as they imply either a decrease or no change in the price of college tuition, which is not supported by the information provided.

Question 6

Using the generational accounting method as a measure of the long-run budget,which of the following statements is TRUE of people living in 1998 regarding net benefits from the government over their lifetime?

Accepted Answer

Based on the generational accounting method, old males are projected to experience a net benefit while young males are not. This is because they will receive more in government benefits than they pay in taxes over their lifetime, while the opposite is true for young males.

Question 7

In January 2001,the Congressional Budget Office (CBO)projected a budget surplus of nearly $6 trillion over the next 10 years,but it never materialized.According to the textbook,what does this erroneous projection imply?

Accepted Answer

The erroneous projection implies that forecasting economic trends several years into the future is challenging and subject to significant uncertainty.

Question 8

If the interest rate is 10%,what is the present discounted value of receiving $100 next year?

Accepted Answer

The formula for present discounted value is:
PV=FV/(1+r)^n
Here, FV=$100, r=10% and n=1 year
PV=100/(1+0.10)^1
PV=90.91
So, the present discounted value of $100 received next year with an interest rate of 10% is $90.91. Therefore, the best choice is C.

Question 9

Cash accounting measures the deficit as the:

Accepted Answer

Cash accounting measures the deficit by looking at the difference between current spending and current tax revenues, so the correct answer is A: the amount by which current spending exceeds current tax revenues. This approach only considers the inflows and outflows of cash during a period and does not take into account non-cash items or future commitments.

Question 10

Which of the following is TRUE?

Accepted Answer

Dynamic scoring accounts for a policy's effects on behavior and the economy, while static scoring does not.

Question 11

Which of the following is TRUE?

Accepted Answer

When the economy is in recession, the cyclically adjusted budget deficit is lower than the reported deficit because automatic stabilizers, such as unemployment insurance and welfare, increase spending and reduce tax revenue, thereby reducing the deficit.

Question 12

If the interest rate is 10%,what is the present discounted value of receiving $100 two years from now?

Accepted Answer

The formula for present value is: 
Present Value = Future Value / (1 + r)^n 
 where r is the interest rate and n is the number of periods. 
Plugging in the numbers, we get: 
Present Value = 100 / (1 + 0.1)^2 
Present Value = 100 / 1.21 
Present Value = $82.64 
Therefore, the best choice is C, $82.64.

Question 13

If the present discounted value of $200 received 3 years from now is $134.32,what is the interest rate?

Accepted Answer

The answer of If the present discounted value of $200...

Question 14

Which of the following is TRUE?

Accepted Answer

Cash accounting is simpler because it records transactions when cash actually changes hands, making it easier to implement than capital accounting, which involves recognizing revenues and expenses when they are incurred, regardless of when cash is exchanged.

Question 15

Suppose cutting taxes both reduces the percentage of income that is taxed and increases the size of taxable incomes.Which scoring method takes both effects into account?

Accepted Answer

Dynamic scoring takes into account the behavioral responses of taxpayers to changes in tax policy, including the potential for tax cuts to increase economic growth and taxable incomes. Static scoring, on the other hand, assumes no behavioral response and only looks at the direct revenue effects of tax changes. Capital scoring and cash scoring are not relevant in this context.

Question 16

According to the approach developed by Gokhale and Smetters in 2003,the discounted value of the long-run fiscal imbalance of Social Security and Medicare programs,as of 2012,was approximately:

Accepted Answer

Gokhale and Smetters' 2003 study estimated the long-run fiscal imbalance of the U.S. Social Security and Medicare programs to be approximately $63 trillion in present value terms as of 2012. This figure reflects the present value of expected future program expenditures minus expected future tax revenues over an infinite horizon.

Question 17

Which of the following occurs when the generational accounting measure is used?

Accepted Answer

Generational accounting measures the lifetime tax burden and benefit receipt of individuals born in a particular year. Therefore, option B is the correct choice, as it suggests that males born in 1998 will pay more in taxes than they will receive in benefits from the government over their lifetime. Option A is incorrect, as it suggests that this group will receive more benefits than they pay in taxes. Option C is also incorrect, as it considers a different age group than those born in 1998. Option D is incorrect, as the measure explicitly attempts to project future tax liabilities.

Question 18

If debt is a nominal obligation to borrowers:

Accepted Answer

Inflation decreases the real value of money over time, which means the real value of the debt decreases as well. Therefore, when inflation occurs, the burden of nominal debt (the amount that needs to be repaid) effectively becomes less in real terms.

Question 19

Which one of the following factors is a concern about long-run imbalance measures?

Accepted Answer

Long-run imbalance measures rely heavily on assumptions about future growth rates of costs and incomes, which can be difficult to predict accurately. Therefore, there is a risk that these measures may not be reliable or may need to be revised as new information becomes available.

Question 20

When the price level rises,the:

Accepted Answer

The real burden of the deficit is not affected by changes in the price level because it is determined by the real interest rate and the real value of the debt, not the nominal price level.

Quiz 4: Budget Analysis and Deficit Financing

If the interest rate is 10%,what is the present discounted value of receiving $100 now,$140 next year,and $200 two years from now?

Suppose the federal government has to borrow money because it has budget deficits.What is the mechanism through which this borrowing might crowd out private borrowing and capital accumulation?

Suppose your state passes a law that adjusts spending,based on a preset formula,to offset cyclical changes in the economy.This is an example of:

The U.S.government uses:

Which of the following must be TRUE if the price of college tuition has risen faster than the consumer price index in the past 20 years?

Using the generational accounting method as a measure of the long-run budget,which of the following statements is TRUE of people living in 1998 regarding net benefits from the government over their lifetime?

In January 2001,the Congressional Budget Office (CBO) projected a budget surplus of nearly $6 trillion over the next 10 years,but it never materialized.According to the textbook,what does this erroneous projection imply?

If the interest rate is 10%,what is the present discounted value of receiving $100 next year?

Cash accounting measures the deficit as the:

Which of the following is TRUE?

Which of the following is TRUE?

If the interest rate is 10%,what is the present discounted value of receiving $100 two years from now?

If the present discounted value of $200 received 3 years from now is $134.32,what is the interest rate?

Which of the following is TRUE?

Suppose cutting taxes both reduces the percentage of income that is taxed and increases the size of taxable incomes.Which scoring method takes both effects into account?

According to the approach developed by Gokhale and Smetters in 2003,the discounted value of the long-run fiscal imbalance of Social Security and Medicare programs,as of 2012,was approximately:

Which of the following occurs when the generational accounting measure is used?

If debt is a nominal obligation to borrowers:

Which one of the following factors is a concern about long-run imbalance measures?

When the price level rises,the: