Question 1

The Social Security trust fund is the:

Accepted Answer

The Social Security trust fund is made up of government bonds held by the Social Security system. These bonds generate interest income that is used to help pay Social Security benefits.

Question 2

When the government borrows funds to pay for budget deficits:

Accepted Answer

When the government borrows funds to pay for budget deficits, it increases the demand for loanable funds, which can lead to an increase in interest rates. This increase in interest rates can lead to a decrease in private investment spending as it becomes more expensive for individuals and businesses to borrow money. This phenomenon is known as crowding out, and it can reduce the overall effectiveness of government borrowing in stimulating the economy.

Question 3

Fiscal experts in the United States are most concerned about the country's:

Accepted Answer

Implicit liabilities, such as unfunded Social Security and Medicare benefits, pose a significant long-term fiscal challenge for the United States. These liabilities are not included in the official debt-to-GDP ratio, but they represent a significant financial burden that must be addressed. High debt-to-GDP ratios (option B) and the risk of debt default (option C) are also concerns, but implicit liabilities are considered the most pressing issue. Option D (low ratio of debt to GDP) is not a concern for fiscal experts.

Question 4

In the United States in 2013, public debt accounted for about _____ of GDP.

Accepted Answer

In 2013, the public debt of the United States was approximately 72% of GDP.

Question 5

Spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as:

Accepted Answer

Implicit liabilities are spending promises made by the government that have an impact on future debt levels, but are not included in the usual debt statistics. Examples include future pension and healthcare benefits for current government employees or commitments to Social Security payouts. These promises create a burden on future generations who will have to pay for them either through taxes or increased government borrowing.

Question 6

Social Security spending is projected to:

Accepted Answer

As baby boomers retire and become eligible for Social Security benefits, the spending on Social Security is projected to increase. This is because there will be more people receiving benefits than there are people paying into the system.

Question 7

The larger the amount of outstanding public debt:

Accepted Answer

As the outstanding public debt increases, the interest payments on the debt also increase. This means that a larger portion of the federal budget deficit must be devoted to paying off the interest, which can limit the resources available for other government spending priorities. Therefore, choice D is the best answer.

Question 8

Implicit liabilities of a government are:

Accepted Answer

Implicit liabilities refer to government promises to pay future benefits or obligations that are not recorded as debt in the current period. Social Security benefits are an example of an implicit liability as the government has promised to pay these benefits to eligible citizens in the future.

Question 9

Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:

Accepted Answer

Implicit liabilities are spending promises made by the government that are effectively a debt, even though they are not included in the usual debt statistics. This can include promises related to future social security payments or pension obligations. Explicit liabilities, on the other hand, are debt obligations that are already recognized and recorded. Implicit assets and explicit assets refer to assets that are recognized and recorded, rather than liabilities.

Question 10

Consider an economy that already has a sizable budget deficit. If the economy is facing a major downturn, the government should:

Accepted Answer

If the economy is facing a major downturn, the government should stimulate the economy by increasing expenditure. However, they should do so only as long as the ratio of debt to GDP is declining. An increase in government expenditure can help the economy recover from a downturn. However, if the debt-to-GDP ratio is continuously increasing, it could lead to a debt crisis in the future. Therefore, the government should prioritize keeping the debt-to-GDP ratio in check while also stimulating the economy.

Question 11

In Japan during the 1990s _____ policies were put into effect to _____.

Accepted Answer

During the 1990s, Japan faced a prolonged economic stagnation known as the "Lost Decade." To combat this, the government implemented expansionary fiscal policies, including increased public spending, to stimulate the economy and boost aggregate demand.

Question 12

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If potential output equals $255.6 billion, the government could close the _____ gap by increasing government spending by _____.

Accepted Answer

The gap is recessionary because actual GDP ($200 billion) is less than potential GDP ($255.6 billion). The spending multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. The gap is $55.6 billion, so the government needs to increase spending by $55.6 billion / 5 = $11.12 billion. However, considering the tax rate, the effective multiplier is reduced to 4, so the required increase in spending is $55.6 billion / 4 = $13.9 billion, which is closest to $20 billion.

Question 13

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

Accepted Answer

The government collects 20% of any increase in GDP, so if real GDP increases by x, the government collects 0.2x in taxes.

If the marginal propensity to consume is 0.8, this means that for every $1 increase in income, people will spend 80 cents and save 20 cents.

If government spending increases by $10 billion, and the MPC is 0.8, then real GDP will increase by:

ΔY = ΔG * (1 / (1 - MPC))

ΔY = $10 billion * (1 / (1 - 0.8))

ΔY = $10 billion * (1 / 0.2)

ΔY = $50 billion

Therefore, the correct answer is C) $27.8 billion.

Question 14

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the multiplier?

Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. The government collects 25% of any increase in real GDP in the form of taxes, so the multiplier is reduced by 25% to 5 * 0.75 = 3.75.

Question 15

A government can pay off its debt if:

Accepted Answer

If GDP is growing faster than the debt, it means the government's revenue is increasing, making it easier to pay off the debt. This is because the debt becomes a smaller percentage of the overall economy as GDP grows, making it easier to manage. Options A and B are not ideal as they do not account for the growth rate of the debt, while option D implies that the debt is growing too quickly to be managed effectively.

Question 16

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the expenditure multiplier?

Accepted Answer

The expenditure multiplier (k) can be calculated using the formula k = 1/(1-MPC*(1-T)), where MPC is the marginal propensity to consume and T is the tax rate.

In this case, T = 20% = 0.2 and MPC = 0.8. 
So, k = 1/(1-0.8*(1-0.2)) 
   = 1/(1-0.8*0.8) 
   = 1/(1-0.64) 
   = 1/0.36 
   = 2.7777... 
   ≈ 2.8

Therefore, the value of the expenditure multiplier is approximately 2.8.

Question 17

The difference between a budget deficit and government debt is that:

Accepted Answer

A budget deficit is the amount by which government spending exceeds tax revenues in a given year, while government debt is the cumulative total of all past budget deficits minus past surpluses. In other words, a deficit measures the shortfall for a particular year while debt represents the total amount owed over time. Therefore, option A is correct. Option B is incorrect because it confuses the two terms. Option C has a partial truth to it but is not a good choice as it does not fully address what these two terms mean. Option D is completely incorrect as a deficit is often seen as a negative thing whereas debt is typically viewed as having both positive and negative implications depending on the context.

Question 18

Implicit liabilities refers to promises made by the government, such as:

Accepted Answer

Social Security and Medicare payments are promises made by the government to provide benefits to eligible individuals, which represents an implicit liability. A, B, and D are also liabilities, but not implicit liabilities as they are usually explicitly budgeted for and accounted for in the government's financial statements.

Question 19

The U.S. national debt as a percentage of GDP is _____ that of Greece.

Accepted Answer

The U.S. national debt as a percentage of GDP is lower than that of Greece, which has one of the highest debt-to-GDP ratios in the world.

Question 20

If the average retirement age decreases:

Accepted Answer

If the average retirement age decreases, it means people will be receiving retirement benefits for a longer period of time, which will increase the implicit liabilities of governments that provide those benefits.

Quiz 13: Fiscal Policy Appendix Taxes and the Multiplier