Deck 15: Government Spending and Its Financing

Question 1

The amount by which government purchases and transfers exceed tax revenues is known as the

A)primary surplus.
B)primary deficit.
C)primary current deficit.
D)government debt.

Answer 1

B

Question 2

The primary deficit is equal to

A)outlays - tax revenues.
B)government purchases + transfers + net interest - tax revenues.
C)outlays + net interest - tax revenues.
D)government purchases + transfers - tax revenues.

Answer 2

D

Question 3

Interest payments by the government as a share of GDP

A)have steadily increased from the 1940s to the 2010s.
B)remained fairly steady from the 1940s to the 2010s.
C)increased in the 2000s and 2010s,but were fairly steady before that.
D)increased sharply in the 1940s and 1980s.

Answer 3

D

Question 4

Compared with other countries in the OECD,French government spending relative to GDP is

A)among the highest.
B)about average.
C)slightly below average.
D)among the lowest.

Question 5

The current deficit is

A)the deficit minus government investment.
B)the deficit plus net interest payments.
C)the deficit minus current expenditures.
D)the deficit minus depreciation.

Question 6

The primary deficit is equal to

A)the amount by which government purchases,transfers,and net interest exceed tax revenues.
B)the amount by which government purchases and transfers exceed tax revenues.
C)the deficit plus net interest payments.
D)total tax revenues minus net interest minus government expenditures.

Question 7

Compared with other countries in the OECD,U.S.government spending relative to GDP is

A)among the highest.
B)about average.
C)slightly below average.
D)among the lowest.

Question 8

State and local governments rely on ________ as their primary source of tax receipts.

A)personal taxes
B)contributions for social insurance
C)indirect business taxes
D)corporate taxes

Question 9

From the 1950s to the 2010s,transfer payments' share of GDP

A)steadily increased.
B)steadily decreased.
C)remained fairly steady.
D)increased during Democratic administrations and decreased during Republican administrations.

Question 10

The three main categories of government outlays are

A)net interest payments,government investment,and government consumption expenditures.
B)net government subsidies,the government deficit,and government purchases.
C)government purchases,transfer payments,and net interest payments.
D)government consumption expenditures,government investment,and transfer payments.

Question 11

The deficit is

A)the amount by which government purchases,transfers,and net interest exceed tax revenues.
B)the amount by which government purchases and transfers exceed tax revenues.
C)the primary deficit minus net interest payments.
D)total tax revenues minus net interest minus government expenditures.

Question 12

The primary current deficit is

A)current expenditures - tax revenues.
B)current expenditures + transfers + net interest - tax revenues.
C)current expenditures - net interest - tax revenues.
D)current expenditures + transfers - tax revenues.

Question 13

The current deficit minus net interest is called the

A)primary deficit.
B)net current deficit.
C)current surplus.
D)primary current deficit.

Question 14

Subtracting government investment from government purchases gives us the amount of government

A)outlays.
B)primary expenditures.
C)secondary spending.
D)consumption expenditures.

Question 15

The type of tax receipts that has shown the largest growth since the end of World War II has been

A)personal taxes.
B)contributions for social insurance.
C)taxes on production and imports.
D)corporate taxes.

Question 16

Net interest payments by the government are usually

A)small and sometimes negative for both the federal,and state and local governments.
B)small and sometimes negative for the federal government,but large and positive for state and local governments.
C)small and sometimes negative for state and local governments,but large and positive for the federal government.
D)large and positive for both the federal,and state and local governments.

Question 17

The type of tax receipts that has shown the slowest growth since World War II has been

A)personal taxes.
B)contributions for social insurance.
C)taxes on production and imports.
D)corporate taxes.

Question 18

The current deficit is

A)the deficit plus net interest payments.
B)current expenditures minus tax revenues.
C)outlays minus tax revenues.
D)the deficit minus depreciation.

Question 19

From the late 1960s to the late 1990s,the share of GDP devoted to government purchases

A)drifted gradually upward.
B)drifted gradually downward.
C)remained fairly steady.
D)increased,but only after the onset of a war or a military buildup.

Question 20

The largest source of tax receipts for the government is

A)personal taxes.
B)contributions for social insurance.
C)taxes on production and imports.
D)corporate taxes.

Question 21

At the beginning of year one,there is no government debt outstanding.The government runs a $100 billion deficit in year one.Interest at a nominal rate of 10% must be paid starting in year two.Assume nominal GDP in year one is $2000 billion and the nominal growth rate of GDP is 4%.Assume the government balances its primary budget in the future and the interest rate and growth rate do not change.
(a)What will be the government deficit in years two,three,four,and five?
(b)What will be the value of government bonds outstanding at the end of the fifth year?
(c)What will be the debt-GDP ratio at the end of year five?

Question 22

Suppose that all workers place a value on their leisure of 40 goods per day.The production function relating output per day Y to the number of people working per day N is
Y = 200N - N2
And the marginal product of labor is
MPN = 200 - 2N.
A 20% tax is levied on wages.Output per day would be

A)5,625.
B)7,250.
C)9,375.
D)11,250.

Question 23

Because of automatic stabilizers,in recessions the government budget deficit ________,while in expansions the deficit ________.

A)falls; rises
B)falls; falls
C)rises; falls
D)rises; rises

Question 24

You are given the following budget data for a country that has both a central government and local governments.

(a)How much is the deficit for the central government,the local government,and the total of the central and local governments?
(b)How much is the primary deficit for the central government,the local government,and the total of the central and local governments?

Question 25

The total amount of taxes paid divided by before-tax income is the

A)median taxpayer rate.
B)rate of hysteresis.
C)average tax rate.
D)marginal tax rate.

Question 26

Which of the following would not act as an automatic stabilizer?

A)Unemployment insurance
B)Government purchases
C)Personal income taxes
D)Corporate income taxes

Question 27

Government capital consists of

A)money owned by the government.
B)securities owned by the government.
C)the buildings owned by the government in Washington,D.C.
D)long-lived physical assets owned by the government.

Question 28

The following data describe government spending and revenue.

(a)How much is the budget deficit?
(b)How much is the primary budget deficit?
(c)How much is the full-employment budget deficit?
(d)How much is the current deficit?
(e)How much is the current primary deficit?

Question 29

An increase in the average tax rate,with the marginal tax rate held constant,will

A)increase the amount of labor supplied at any real wage.
B)not affect the amount of labor supplied at any real wage.
C)decrease the amount of labor supplied at any real wage.
D)increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate,but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

Question 30

Provisions in the budget that cause government spending to rise or taxes to fall without legislation when GDP falls are known as

A)primary deficit enhancers.
B)expansionary fiscal stimulus.
C)non-political fiscal policy.
D)automatic stabilizers.

Question 31

A decrease in the marginal tax rate,with the average tax rate held constant,will

A)increase the amount of labor supplied at any real wage.
B)not affect the amount of labor supplied at any real wage.
C)decrease the amount of labor supplied at any real wage.
D)increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate,but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

Question 32

Since 1960,the only period of several years when the full-employment government budget deficit was negative (that is,there was a full-employment surplus)was

A)from 2000 to 2005.
B)the late 1990s and early 2000s.
C)the mid-1980s.
D)the early 1970s.

Question 33

All of the following are government capital EXCEPT

A)roads.
B)schools.
C)Treasury securities.
D)mass-transit systems.

Question 34

The political process by which fiscal policy is made

A)is relatively rapid,contributing to the effectiveness of fiscal policy.
B)requires only that the president approve changes to the budget,a decision that takes several months.
C)is efficient in reaching a decision within a year.
D)is slow and results in a long time lag for fiscal policy.

Question 35

Classical economists think that lump-sum tax changes

A)should be used to smooth business cycles.
B)have a powerful effect on the economy.
C)affect aggregate demand after a lag.
D)have no effect because of Ricardian equivalence.

Question 36

A decrease in the average tax rate,with the marginal tax rate held constant,will

A)increase the amount of labor supplied at any real wage.
B)not affect the amount of labor supplied at any real wage.
C)decrease the amount of labor supplied at any real wage.
D)increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate,but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

Question 37

The amount the government budget deficit would be if the economy were at full employment is known as the

A)primary deficit.
B)full-employment deficit.
C)natural deficit.
D)current deficit.

Question 38

An increase in the marginal tax rate,with the average tax rate held constant,will

A)increase the amount of labor supplied at any real wage.
B)not affect the amount of labor supplied at any real wage.
C)decrease the amount of labor supplied at any real wage.
D)increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate,but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

Question 39

An example of an automatic stabilizer is

A)consumer spending.
B)inflation.
C)unemployment insurance.
D)discretionary fiscal policy.

Question 40

The marginal tax rate is

A)the fraction of an additional dollar of income that must be paid in taxes.
B)the total amount of taxes paid divided by after-tax income.
C)the total amount of taxes paid divided by before-tax income.
D)the average amount of government spending that is financed by taxes.

Question 41

Suppose that all workers place a value on their leisure of 75 goods per day.The production function relating output per day Y to the number of people working per day N is
Y = 500N - 0.4 N2,
and the marginal product of labor is
MPN = 500 - 0.8 N.
A 25% tax is levied on wages.
(a)How much is output per day?
(b)In terms of lost output,what is the cost of the distortion introduced by this tax?

Question 42

Assume that the lost output due to tax distortions is proportional to the square of the tax rate.If the average cost of the distortion created by taxes is currently $1000,and the tax rate is increased from 40% to 50%,the average cost of the distortion created by taxes will increase to

A)$383.33.
B)$450.00.
C)$640.
D)$1562.50.

Question 43

If the deficit is 0.02 times GDP,the existing debt/GDP ratio is 0.5,and the growth rate of nominal GDP is 0.03,then the change in the debt-GDP ratio is

A)+0.05
B)+0.025.
C)0)
D)-0.025.

Question 44

An example of tax smoothing is provided by evidence of

A)temporary changes in defense expenditures by the government.
B)reductions in tax rates prior to presidential elections.
C)Keynesian tax cuts designed to help the economy recover from a recession.
D)reliance on debt financing rather than taxation during World War II.

Question 45

Suppose that the federal income tax on individuals is set up as follows:
Income above&Income belowTaxes
0$80000.10 × income
$8000$35,000$800 + [0.15 × (income - $8000)]
$35,000 & up$4850 + [0.25 × (income - $35,000)]
Calculate the average tax rate and marginal tax rate for workers with the following levels of income:
(a)$6500
(b)$27,000
(c)$72,000
(d)$250,000

Question 46

According to current projections,in about 2033,the Social Security trust fund will

A)own all the government bonds that have been issued.
B)own about half of all the stock issued on the New York Stock Exchange.
C)run out of assets.
D)start to run deficits.

Question 47

If the deficit is 0.1 times GDP,the existing debt/GDP ratio is 0.5,and the growth rate of nominal GDP is 0.04,then the change in the debt-GDP ratio is

A)+0.08
B)+0.075.
C)0)
D)-0.075.

Question 48

Which of the following policies would not prevent the Social Security trust fund from running out of assets?

A)Reduce promised benefits
B)Reduce taxes
C)Increase taxes
D)Earn a higher rate of return

Question 49

Suppose that all workers place a value on their leisure of 40 goods per day.The production function relating output per day Y to the number of people working per day N is
Y = 200N - N2
And the marginal product of labor is
MPN = 200 - 2N.
A 20% tax is levied on wages.In terms of lost output,what is the cost of the distortion introduced by this tax?

A)25
B)75
C)150
D)225

Question 50

To earn a higher return on the assets in the Social Security trust fund,a suggestion has been made to allow the trust fund to

A)buy government bonds.
B)sell limited partnerships.
C)sell insurance.
D)invest in the stock market.

Question 51

The total value of government bonds outstanding at any particular time is called the

A)government debt.
B)government deficit.
C)seignorage revenue.
D)yield curve.

Question 52

Increases in the debt-GDP ratio are primarily caused by

A)a high growth rate of GDP.
B)a high government deficit relative to GDP.
C)increases in government borrowing through bonds.
D)increases in interest rates.

Question 53

According to the Ricardian equivalence proposition,current deficits

A)will not affect consumption or national saving.
B)will affect consumption but not national saving.
C)will affect national saving but not consumption.
D)will affect both consumption and national saving.

Question 54

The average cost of the distortion created by taxes

A)increases proportionately with the tax rate.
B)is lower when the tax rate is constant than when it fluctuates.
C)is higher when the tax rate is constant than when it fluctuates.
D)equals the square root of the tax rate.

Question 55

If the deficit is 0.08 times GDP,the existing debt/GDP ratio is 0.8,and the growth rate of nominal GDP is 0.05,then the change in the debt-GDP ratio is

A)+0.08
B)+0.04.
C)0)
D)-0.08.

Question 56

A Social Security system in which payroll taxes that workers and their employers pay in go directly to retirees and other beneficiaries is known as

A)a pay-as-you-go system.
B)an individual-account system.
C)a primary-deficit system.
D)a social-lockbox system.

Question 57

Taxes distort economic behavior because they

A)change the composition of income and spending.
B)cause deviations in economic behavior from the efficient,free-market outcome.
C)change the balance between private and public expenditures.
D)change the composition of consumption,investment,government spending,and net exports.

Question 58

Recent proposals to allow the Social Security trust fund to invest in the stock market (instead of buying government bonds)are based on the premise that

A)the returns to stocks are higher than the returns to bonds.
B)the returns to stocks aren't as risky as the returns to bonds.
C)the transactions costs for investing in stocks are lower than the transactions costs for investing in bonds.
D)stocks are more liquid than bonds.

Question 59

A decreased government deficit created by a lump-sum tax increase will increase national saving if

A)the value of government bonds outstanding grows slower than the public's wealth.
B)it causes consumption to fall.
C)the government runs a primary surplus as a result.
D)the real interest rate is less than the growth rate of real GNP.

Question 60

Social Security benefits could be reduced in each of the following ways EXCEPT

A)cutting the promised monthly benefit.
B)increasing the retirement age.
C)investing the trust fund in the stock market.
D)reducing the degree to which benefits are adjusted for inflation.

Question 61

Real money demand in the economy is given by
L = 0.5Y - 2500i,
Where Y is real income and i is the nominal interest rate.In equilibrium,real money demand L equals real money supply M/P.Suppose that Y equals 1000 and the real interest rate is 0.02.What is the maximum amount of seignorage revenue?

A)11.11
B)20.25
C)22.25
D)24.75

Question 62

Consider an economy that has the following monetary data.

The monetary base and the money supply are expected to grow at a constant rate of 20% per year.Inflation and expected inflation are 20% per year.Suppose that bank reserves and currency pay no interest,all currency is held by the public,and bank deposits pay no interest.What is the cost to the public of the inflation tax?

A)$60
B)$140
C)$190
D)$200

Question 63

Why is the Social Security system in crisis at a time when it's running large surpluses? What's the source of the problem? What solutions have been proposed?

Question 64

In an all-currency economy in which real output and the real interest rate are fixed and the rates of money growth and inflation are constant,the inflation rate equals

A)the real interest rate.
B)the nominal interest rate.
C)the growth rate of the nominal money supply.
D)the level of real seignorage revenue.

Question 65

Who bears the burden of the government debt? Explain why.Under what circumstances is there no burden to be borne?

Question 66

The inflation tax is primarily a tax on

A)government bonds.
B)Social Security recipients.
C)money.
D)real income.

Question 67

Find the largest nominal deficit that the government can run without raising the debt-GDP ratio,under each of the following sets of assumptions:
(a)Suppose that real GDP is 20,000 and remains constant,nominal GDP is initially 30,000,inflation is 4%,and the debt-GDP ratio is 1.2.
(b)Suppose that nominal GDP growth is 5% and outstanding nominal debt is 1500.

Question 68

Seignorage is the revenue a government raises by

A)taxation.
B)printing money.
C)borrowing money.
D)charging fees for services.

Question 69

In which case would you be most likely to expect inflation to occur?

A)The government runs a sustained government deficit by lowering taxes.
B)The government runs a sustained government deficit by increasing purchases.
C)The government runs a sustained primary deficit by increasing purchases.
D)The government funds its sustained deficit by increasing the money supply.

Question 70

The relationship between the government deficit and the change in the monetary base is

A)deficit equals change in government debt held by the public minus change in monetary base.
B)deficit equals change in government debt held by the public plus change in monetary base.
C)deficit equals change in government debt outstanding plus change in monetary base.
D)deficit equals change in government debt outstanding minus change in monetary base.

Question 71

Suppose that real GDP is 10,000 and remains constant,nominal GDP is initially 30,000,inflation is 3%,and the debt-GDP ratio is 0.7.Find the largest nominal deficit that the government can run without raising the debt-GDP ratio.

Question 72

Assume that in an all-currency economy the real interest rate is 4%,the expected rate of inflation is 8%,and the nominal interest rate is 12%.The monetary base equals $50 billion.The real seignorage revenue collected by the government would equal

A)$4 billion.
B)$6 billion.
C)$8 billion.
D)$12 billion.

Question 73

The revenue that a government raises by printing money is called

A)seignorage.
B)monetary revenue.
C)currency credit.
D)currency inflation.

Question 74

Deficits are a burden on future generations if they

A)cause higher rates of inflation to occur.
B)are not used for government capital formation.
C)cause national saving to fall.
D)are always a primary government deficit.

Question 75

According to the Ricardian equivalence proposition,a government budget deficit created by a temporary tax cut

A)does not affect desired national saving.
B)does not affect expected future taxes.
C)reduces desired investment spending.
D)increases the real interest rate.

Question 76

State governments in the United States can raise revenue by all the following means EXCEPT

A)increasing income taxes.
B)increasing taxes on corporate profits.
C)increasing sales taxes.
D)increasing the money supply.

Question 77

Real money demand in the economy is given by
L = 0.5Y - 2500i,
Where Y is real income and i is the nominal interest rate.In equilibrium,real money demand L equals real money supply M/P.Suppose that Y equals 1000 and the real interest rate is 0.02.At what rate of inflation is seignorage maximized?

A)0)05
B)0)075
C)0)09
D)0)10

Question 78

What are the main reasons (give at least three)that Ricardian equivalence might not hold?

Question 79

The stimulus package of 2009 had the effect of

A)causing higher rates of inflation to occur.
B)giving new foreign aid to help less developed countries.
C)significantly raising the debt to GDP ratio.
D)reducing the primary government deficit.

Question 80

The real seignorage collected by the government in an all-currency economy is the product of

A)the rate of inflation and the real supply of government bonds.
B)the rate of inflation and the real money supply.
C)the debt/GDP ratio and the real money supply.
D)the debt/GDP ratio and the rate of inflation.