Question 1

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

Accepted Answer

According to the latest data available, Canada's national debt as a percentage of GDP was 31.1% in 2019, while Greece's was 176.6% in the same year. Therefore, the Canadian national debt as a percentage of GDP is lower than that of Greece.

Question 2

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

Accepted Answer

During a major downturn, the government should stimulate the economy by increasing its expenditure, even if it already has a sizable budget deficit. However, it is important to ensure that the ratio of debt to GDP is declining. This means that the expansionary fiscal policies should lead to economic growth, which in turn would increase the GDP and make the debt-to-GDP ratio manageable. Therefore, choice A is the best option.

Question 3

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

Accepted Answer

The answer of In Japan during the 1990s,_____ policies were...

Question 4

A government can pay off its debt if:

Accepted Answer

If GDP grows faster than the debt, then the government's ability to pay off their debt increases over time. This means that the debt-to-GDP ratio will decrease, making the debt more manageable for the government in the long run.

Question 5

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, thus raising interest rates. This results in crowding out of private investment spending, as they find it expensive to borrow funds for investment.

Question 6

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

Accepted Answer

Implicit liabilities are a major concern for fiscal experts in Canada because they represent a potential future obligation that is not currently reflected on the government's balance sheet. These liabilities can arise from a variety of sources, such as pension plans, health care benefits, and environmental cleanup costs. If these liabilities were to materialize, they could put a significant strain on the government's finances.

Question 7

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

Accepted Answer

A budget deficit is the difference between government spending and tax revenues in a given year. On the other hand, government debt is the accumulation of budget deficits over time, meaning it is the total amount the government owes to lenders. Thus, option A is correct as it differentiates between the two concepts appropriately. Option B is incorrect as it is the opposite of the correct explanation. Option C is partially correct but does not fully describe the difference between the two concepts. Option D is incorrect as a deficit and debt can have various impacts on the economy depending on how they are managed by the government.

Question 8

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

Accepted Answer

Social insurance payments, such as pensions and healthcare benefits, are a type of implicit liability because they represent promises made by the government to its citizens to provide these services in the future. Aid to foreign countries, building roads and bridges, and contributions to the CBC are all forms of explicit expenditures that are typically included in the government's budget.

Question 9

The larger the amount of outstanding public debt:

Accepted Answer

The larger the amount of outstanding public debt, the larger the fraction of the federal budget deficit that must be devoted to interest payments. This means that more money will need to be allocated to paying off the interest on the debt, leaving less money for other government spending priorities.

Question 10

Social insurance spending is projected to:

Accepted Answer

Social insurance programs such as Social Security and Medicare are primarily designed to provide support for retirees, and with the aging baby boomer population, the number of people eligible for these benefits is expected to increase. Therefore, spending on social insurance is projected to increase as baby boomers retire.

Question 11

In 2015 Canadian public debt accounted for about _____% of GDP.

Accepted Answer

According to data from the World Bank, in 2015 Canadian public debt accounted for approximately 31% of the country's GDP. This means that the total amount of money owed by the Canadian government was equivalent to about one-third of the value of all goods and services produced by the Canadian economy in that year.

Question 12

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 answer of Real GDP equals $400 billion,the government collects...

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.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 14

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 answer of Real GDP equals $200 billion,the government collects...

Question 15

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 promises of future government spending that are not included in official debt statistics. This can include commitments such as future pension payments, healthcare costs, and social security benefits. These promises can represent a significant burden on future government budgets and can lead to a structural deficit if they are not adequately addressed.

Question 16

Which of the following is NOT an implicit liability?

Accepted Answer

EI payments are not an implicit liability because they are paid out of current revenues, not from future taxes.

Question 17

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 multiplier effect is given by:
Multiplier = 1 / (1 - MPC)
where MPC is the marginal propensity to consume.

In this case, MPC = 0.8, so the multiplier is:
Multiplier = 1 / (1 - 0.8) = 5

This means that a $10 billion increase in government spending will lead to an increase in real GDP of:
Increase in real GDP = Multiplier * Increase in government spending
Increase in real GDP = 5 * $10 billion = $50 billion

However, the government only collects 20% of any increase in real GDP in the form of taxes. So, the actual increase in real GDP that the government can count on receiving in tax revenue is:
Actual increase in real GDP = (1 - 0.2) * $50 billion = $40 billion

Therefore, the increase in real GDP due to the government spending would be $40 billion, which is closest to option C ($27.8 billion is too low and $50 billion is too high).

Question 18

If the average retirement age decreases:

Accepted Answer

If the average retirement age decreases, more people will be eligible for retirement benefits at a younger age, resulting in an increase in implicit liabilities for the government to fulfill those obligations.

Question 19

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 governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics. These may include promises for future social security, healthcare, and pension benefits.

Question 20

Implicit liabilities of a government are:

Accepted Answer

Implicit liabilities refer to those obligations that a government has but are not recorded in their official accounts. Option B specifies that these are spending promises that are effectively debt. These promises refer to social insurance benefits, such as pensions or healthcare, that a government has committed to providing to its citizens. Although they are not associated with a bond, they still represent a liability for the government as they are legally obligated to pay them in the future. Therefore, option B is the best choice for implicit liabilities.

Quiz 13: Fiscal Policy