Question 1

If at the beginning of the year the public debt is $12 trillion, government spending and transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the year the public debt is $13 trillion.

Accepted Answer

The public debt would decrease by $1 trillion, as tax revenues exceed government spending and transfers by $1 trillion.

Question 2

In the United States 49 of the 50 states are required to have an annually balanced budget, which worsens the severity of the business cycle.

Accepted Answer

Yes, most states in the US are required to have a balanced budget every year, which means that they cannot spend more than they receive in revenue. This can worsen the severity of economic downturns because states may be forced to cut spending or raise taxes during recessions, which can exacerbate the negative effects on the economy.

Question 3

The economy is in a recessionary gap. What are the fiscal policy options available to the government?

Accepted Answer

The answer of The economy is in a recessionary gap....

Question 4

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.

Accepted Answer

If the GDP is growing faster than the debt despite consecutive budget deficits, this means the economy is expanding which would lead to a decrease in the ratio of debt to GDP. Therefore, the statement is false.

Question 5

In 2009 Greece received emergency loans from other European countries and the International Monetary Fund. These loans required the Greek government to cut spending, which worsened the Greek recession.

Accepted Answer

This is true. The loans came with conditions that required Greece to implement austerity measures, including spending cuts, which contributed to a worsening of the recession in Greece.

Question 6

The economy is in an inflationary gap. What are the fiscal policy options available to the government?

Accepted Answer

The answer of The economy is in an inflationary gap....

Question 7

Public debt is government debt held by individuals and institutions outside the government.

Accepted Answer

Public debt refers to the debt owed by governments to individuals and institutions such as banks, foreign governments, and pension funds, among others. This debt excludes any debt owed by the government to its own agencies or departments.

Question 8

The main problem facing the government of Greece in 2009 was that it had a large budget surplus.

Accepted Answer

The main problem facing the government of Greece in 2009 was actually a large budget deficit, as their government spending had exceeded their revenue. This led to a financial crisis and bailout by international organizations such as the IMF and EU.

Question 9

Many economists caution against extremely active stabilization policy because of time lags in its use. Explain this rationale.

Accepted Answer

The answer of Many economists caution against extremely active stabilization...

Question 10

As a country's public debt grows, the portion of its budget devoted to interest payments on the debt will decrease.

Accepted Answer

As a country's public debt grows, the portion of its budget devoted to interest payments on the debt will increase. This is because the larger the debt, the more interest the government will have to pay on it each year. This means that less money will be available for other expenses such as healthcare, education, and infrastructure.

Question 11

A fiscal year for the federal government runs from January 1 to December 31.

Accepted Answer

The federal government's fiscal year runs from October 1 to September 30.

Question 12

If a government has large consecutive budget deficits and if the public debt is growing faster than GDP, its ratio of debt to GDP will increase.

Accepted Answer

When a government has consecutive budget deficits and the public debt is growing faster than GDP, it means that the government is borrowing more than it is earning through taxes and other sources. This leads to an increase in the government's total debt level, and when the debt increases faster than GDP, the debt-to-GDP ratio also increases. Therefore, it is true that a government with large consecutive budget deficits will see an increase in the ratio of debt to GDP.

Question 13

If a country has a very high level of public debt, lenders may insist on austerity measures of raising taxes and decreasing government spending, which worsens economic conditions.

Accepted Answer

When a country has a high public debt, lenders may demand austerity measures to ensure that the country can repay its debt. This often involves raising taxes and cutting government spending, which can worsen economic conditions in the short term. These measures can lead to decreased consumer spending, reduced economic growth, and increased unemployment. However, in the long run, reducing debt can lead to a more stable and sustainable economy.

Question 14

What is meant by the term social insurance? Give an example of a social insurance program.

Accepted Answer

The answer of What is meant by the term social...

Question 15

If debt increases faster than GDP, the ratio of debt to GDP will fall.

Accepted Answer

If debt increases faster than GDP, it means that the debt is growing at a faster rate than the economy. This will result in a higher debt-to-GDP ratio, not a lower one.

Question 16

In 2009 many lenders refused to make more loans to Greece because they were not confident that Greece was able to repay its debt.

Accepted Answer

This is true. Many lenders were hesitant to lend more money to Greece because of concerns about their ability to repay their debt. This led to a financial crisis in Greece and set the country on a path to economic problems that continue to this day.

Question 17

The ratio of debt to GDP is a way to assess the ability of a government to pay its debts because it is an indicator of the taxes that the government can collect to pay the debt.

Accepted Answer

The ratio of debt to GDP is a measure of the size of a country's debt in relation to its economic output. It helps assess the sustainability of a country's debt and its ability to pay it off. The higher the ratio, the more difficult it may be for a government to service its debt, as a larger portion of the country's resources may need to be devoted to paying interest and principal. This ratio does not necessarily reflect the amount of taxes a government can collect, but it may impact a country's credit rating and borrowing costs, which can affect its ability to repay its debts.

Question 18

When governments borrow in financial markets to pay for budget deficits, interest rates may increase and crowd out private investment spending.

Accepted Answer

This is because when the government borrows in financial markets, it increases the demand for loanable funds, which can drive up interest rates, making it more expensive for private investors to borrow money for their own investments. This can lead to decreased private investment spending or "crowding out."

Question 19

The promise to pay Social Security benefits to the baby boomers is an example of the implicit liabilities of the U.S. government.

Accepted Answer

The promise to pay Social Security benefits to the baby boomers is an obligation that the government has implicitly taken on, making it an example of implicit liabilities.

Question 20

If the ratio of debt to GDP increases over time, it means that the government's burden of paying the debt is decreasing and default is less likely.

Accepted Answer

If the ratio of debt to GDP increases over time, it means that the government is taking on more debt relative to the size of the economy. This increases the burden of paying the debt and makes default more likely, as the government may struggle to make payments on the growing debt.

Quiz 13: Fiscal Policy Appendix Taxes and the Multiplier