Question 1

An economy has a debt of $50 billion at the beginning of the year. Tax revenues, net of transfers, are equal to $10 billion while spending is $15 billion. At the end of the year, the debt is $45 billion.

Accepted Answer

The debt at the end of the year would increase, not decrease, because spending exceeds tax revenues. The correct end-of-year debt would be $55 billion ($50 billion initial debt + $5 billion deficit).

Question 2

Most current automatic stabilizers were introduced during the Great Depression.

Accepted Answer

The answer of Most current automatic stabilizers were introduced during...

Question 3

With automatic stabilizers, when the economy goes into an expansion, a budget deficit is automatically created.

Accepted Answer

Automatic stabilizers actually work in the opposite way. During an economic expansion, automatic stabilizers decrease the budget deficit (or increase the surplus) by reducing expenditures on programs like unemployment insurance and food stamps, and increasing tax revenues from higher incomes and profits. This helps to prevent the economy from overheating and causing inflation.

Question 4

An economy has a debt of $50 billion at the beginning of the year. Tax revenues, net of transfers, are $10 billion while government spending is $15 billion. At the end of the year, the debt is $55 billion.

Accepted Answer

The economy's debt increased by $5 billion ($15 billion in spending minus $10 billion in revenues), matching the increase from $50 billion to $55 billion.

Question 5

With automatic stabilizers, attempts to balance the government budget during a recession will automatically stabilize the economy at potential GDP.

Accepted Answer

Automatic stabilizers can help mitigate the impact of a recession by increasing government spending and reducing taxes automatically, which can boost aggregate demand and help stabilize the economy. However, they may not be enough to fully stabilize the economy at potential GDP and balancing the government budget during a recession can actually worsen the recession.

Question 6

With automatic stabilizers, attempts to balance the government budget during a recession will decrease aggregate demand and make the recession even worse.

Accepted Answer

Automatic stabilizers are designed to counteract the effects of a recession by increasing government spending and decreasing taxes, which stimulates aggregate demand. If attempts are made to balance the budget during a recession by reducing spending and increasing taxes, it would exacerbate the recession by reducing aggregate demand even further.

Question 7

A budget surplus means that spending is greater than revenues.

Accepted Answer

A budget surplus means that revenues are greater than spending.

Question 8

An economy has a debt of $20 billion at the beginning of the year. Government spending is $10 billion, and the budget surplus is $5 billion. At the end of the year, the debt is $15 billion.

Accepted Answer

The budget surplus of $5 billion means the government is taking in more money than it is spending, which should go towards paying down the debt. Therefore, if the debt started at $20 billion and there was a surplus of $5 billion, the debt at the end of the year should be $15 billion.

Question 9

An economy has a debt of $20 billion at the beginning of the year. Tax revenues, net of transfers, are $8 billion and the budget deficit is $6 billion. At the end of the year, the debt is $22 billion.

Accepted Answer

The debt at the end of the year would be $26 billion, calculated by adding the budget deficit of $6 billion to the initial debt of $20 billion.

Question 10

With a balanced budget over the business cycle, surpluses during expansions offset deficits during contractions.

Accepted Answer

During economic expansions, tax revenues tend to rise and government spending on items such as unemployment benefits tends to decrease, leading to surpluses. Conversely, during economic contractions, tax revenues tend to decrease and social safety net spending tends to increase, leading to deficits. By balancing the budget over the business cycle, surpluses can be used to offset deficits, leading to a more stable fiscal policy.

Question 11

Automatic stabilizers work because cyclical budget deficits and surpluses create injections and leakages that counteract the business cycle.

Accepted Answer

Automatic stabilizers such as unemployment benefits and progressive income taxes are designed to increase government spending and decrease tax revenue during economic downturns, which creates injections into the economy. In contrast, during periods of economic expansion, decreased government spending and increased tax revenue create leakages from the economy, helping to prevent overheating and inflation.

Question 12

An economy has $20 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $5 billion while government spending is $15 billion. At the end of the year, the debt is eliminated.

Accepted Answer

The debt would not be eliminated because the government ran a deficit of $10 billion ($15 billion in spending minus $5 billion in tax revenues), which would be added to the existing debt, increasing it rather than eliminating it.

Question 13

If income is less than spending, you have a deficit.

Accepted Answer

If your spending exceeds your income, you have a deficit which means you are spending more than you are earning.

Question 14

Deficits occur when spending is greater than revenues.

Accepted Answer

Deficits occur when a government or individual spends more money than their revenues or income. This can lead to a buildup of debt over time if the deficit is not addressed.

Question 15

Since automatic stabilizers were introduced after the Great Depression, business cycles in Canada have been less frequent, and the contractions have been less severe.

Accepted Answer

Automatic stabilizers, such as unemployment benefits and progressive income taxes, help cushion the impact of economic downturns and stabilize aggregate demand. This results in less frequent and less severe contractions in the business cycle.

Question 16

If income is less than spending, you have a debt.

Accepted Answer

Having income less than spending means you are running a deficit, but it doesn't automatically mean you have debt. Debt occurs when you borrow money to cover the deficit.

Question 17

Automatic stabilizers counteract business cycles, and steer the economy back towards potential GDP.

Accepted Answer

Automatic stabilizers, such as unemployment benefits and progressive income taxes, help to stabilize the economy during recessions by increasing government spending and decreasing tax revenues, which stimulates aggregate demand and counters the negative effects of the business cycle. Conversely, during periods of economic expansion, automatic stabilizers decrease government spending and increase tax revenues, which helps to prevent overheating and inflation by slowing down aggregate demand. Overall, automatic stabilizers can help to steer the economy back towards potential GDP by reducing the severity of business cycle fluctuations.

Question 18

A cyclical surplus is a government budget surplus when the economy is at potential GDP.

Accepted Answer

The answer of A cyclical surplus is a government budget...

Question 19

The word budget comes from a Latin word meaning a pouch or wallet.

Accepted Answer

The word "budget" comes from the Latin word "bulga" which means a pouch or wallet, where people used to keep their money.

Question 20

Government should always try to balance the budget during a recession.

Accepted Answer

During a recession, it may not be feasible for the government to balance the budget due to decreased revenue and increased spending on measures such as stimulus packages and unemployment benefits. It may be more important for the government to prioritize economic recovery and job creation, even if it means running a deficit in the short term.

Quiz 12: Spending Others Money: Fiscal Policy, Deficits, and National Debt