Deck 14: Budget Balance, National Debt, and Investment

Question 1

The questions with which Chapter 14 is concerned include each of the following except

A) from the standpoint of analyzing stabilization policy, what is the best measure of the government's budget balance?
B) from the standpoint of analyzing the effect of changes in the national debt on long-run growth, what is . the best measure of the government's budget balance?
C) why should the government always balance it's budget?
D) what is the typical pattern America's national debt follows over time?

Answer 1

why should the government always balance it's budget?

Question 2

The questions with which Chapter 14 is concerned include each of the following except

A) from the standpoint of analyzing stabilization policy, what is the best measure of the government's budget balance?
B) from the standpoint of analyzing the effect of changes in the national debt on long-run growth, what is the best measure of the economy's trade balance?
C) what are the reasons that we should worry about a rising national debt?
D) what are the reasons that we shouldn't worry about a rising national debt?

Answer 2

from the standpoint of analyzing the effect of changes in the national debt on long-run growth, what is the best measure of the economy's trade balance?

Question 3

The questions with which Chapter 14 is concerned include each of the following except

A) from the standpoint of analyzing stabilization policy, why is it always best to balance the government's budget?
B) what is the typical pattern America's national debt follows over time?
C) how has recent experience in the past generation deviated from this traditional pattern of debt behavior?
D) what is the typical pattern America's national debt follows over time?.

Answer 3

from the standpoint of analyzing stabilization policy, why is it always best to balance the government's budget?

Question 4

The national debt

A) is the annual difference between government spending and tax collections.
B) the total amount of money that households and businesses owe to those from whom they have borrowed.
C) the total amount of money the current generation owes to preceding generations.
D) the total amount of money that the government owes those from whom it has borrowed.

Question 5

In a year when government spending is less than tax collections,

A) the difference is the government's surplus.
B) the difference is the government's deficit.
C) the difference is the government's debt.
D) the difference is the private sector's deficit.

Question 6

In a year when government spending is greater than tax collections,

A) the difference is the government's surplus.
B) the difference is the government's deficit.
C) the difference is the government's debt.
D) the difference is the private sector's surplus.

Question 7

In a year when government spending is less than tax collections,

A) the difference is the government's deficit.
B) the government's debt will increase.
C) the government's debt will decrease.
D) private sector debt will decrease.

Question 8

In a year when government spending is greater than tax collections,

A) the difference is the government's surplus.
B) the government's debt will increase.
C) the government's debt will decrease.
D) private sector debt will decrease.

Question 9

The relationship between the government's debt and the government's deficit (or surplus) is

A) the change in the debt for a year is equal to the deficit (or surplus) for that year.
B) the change in the deficit for a year is equal to the debt (or surplus) for that year.
C) the change in the surplus for a year is equal to the debt (or deficit) for that year.
D) the debt and deficit are the same.

Question 10

Each of the following is a reason why economists are interested in the debt and the deficit except

A) the deficit is a convenient measure of fiscal policy's role in stabilization policy.
B) the deficit affects the position of the IS curve.
C) the deficit affects the position of the LM curve.
D) the debt and deficit are closely connected with national savings and investment.

Question 11

A rising government debt

A) tends to increase capital formation.
B) tends to lower the economy's long-run balanced-growth path.
C) tends to increase the balanced-growth GDP per worker.
D) means that taxes in the future will be lower because of lower interest charges.

Question 12

A rising government debt

A) tends to decrease capital formation.
B) tends to increase the economy's long-run balanced-growth path.
C) tends to increase the balanced-growth GDP per worker.
D) means that taxes in the future will be lower because of lower interest charges.

Question 13

A rising government debt

A) tends to increase capital formation.
B) tends to increase the economy's long-run balanced-growth path.
C) tends to decrease the balanced-growth GDP per worker.
D) means that taxes in the future will be lower because of lower interest charges.

Question 14

A rising government debt

A) tends to increase capital formation.
B) tends to increase the economy's long-run balanced-growth path.
C) tends to increase the balanced-growth GDP per worker.
D) means that taxes in the future will be higher to pay higher interest charges.

Question 15

A decreasing government debt

A) tends to increase capital formation.
B) tends to decrease the economy's long-run balanced-growth path.
C) tends to decrease the balanced-growth GDP per worker.
D) means that taxes in the future will be higher to pay higher interest charges.

Question 16

A decreasing government debt

A) tends to decrease capital formation.
B) tends to increase the economy's long-run s balanced-growth path.
C) tends to decrease the balanced-growth GDP per worker.
D) means that taxes in the future will be higher to pay higher interest charges.

Question 17

A decreasing government debt

A) tends to decrease capital formation.
B) tends to decrease the economy's long-run balanced-growth path.
C) tends to increase the balanced-growth GDP per worker.
D) means that taxes in the future will be higher to pay higher interest charges.

Question 18

A decreasing government debt

A) tends to decrease capital formation.
B) tends to decrease the economy's long-run balanced-growth path.
C) tends to decrease the balanced-growth GDP per worker.
D) means that taxes in the future will be lower because of lower interest charges.

Question 19

An increase in government purchases

A) shifts the LM curve to the right.
B) shifts the IS curve to the right.
C) shifts the LM curve to the left.
D) shifts the IS curve to the left.

Question 20

An increase in government purchases

A) shifts the MPRF curve to the right.
B) shifts the Phillips curve to the right.
C) shifts the MPRF curve to the left.
D) shifts the Phillips curve to the left.

Question 21

A change in government tax policy that increases government tax collections

A) shifts the LM curve to the right and may change its slope.
B) shifts the IS curve to the right and may change its slope.
C) shifts the LM curve to the left and may change its slope.
D) shifts the IS curve to the left and may change its slope.

Question 22

The right measure of fiscal policy is

A) the government's cash deficit or surplus.
B) the government's monetary policy.
C) the level of tax revenue.
D) the full-employment or cyclically-adjusted deficit or surplus.

Question 23

An increase in the full-employment deficit

A) shifts the MPRF curve to the right.
B) shifts the Phillips curve to the right.
C) shifts the MPRF curve to the left.
D) shifts the Phillips curve to the left.

Question 24

An increase in the full-employment deficit

A) shifts the LM curve to the right.
B) shifts the IS curve to the right.
C) shifts the LM curve to the left.
D) shifts the IS curve to the left.

Question 25

If the Federal Reserve tightens monetary policy so that real interest rates increase and real GDP decreases,

A) tax revenues will decrease, decreasing the government's cash deficit, and increasing the full-employment deficit.
B) tax revenues will increase, decreasing the government's cash deficit, and decreasing the full-employment deficit.
C) tax revenues will decrease, increasing the government's cash deficit, but not changing the full- employment budget balance.
D) tax revenues will increase, decreasing the government's cash deficit, but not changing the full-employment budget balance.

Question 26

To turn the cash budget into the full-employment budget,

A) we must adjust the budget deficit or surplus for the automatic reaction of taxes and government spending to the business cycle.
B) we must adjust the budget deficit or surplus for the automatic reaction of the money supply to the business cycle.
C) we must adjust the budget deficit or surplus for the discretionary reaction of taxes and government spending to the business cycle.
D) we must adjust make taxes and government spending independent of the business cycle.

Question 27

When real GDP decreases and unemployment increases

A) tax revenue increases and social welfare spending decreases, swinging the cash budget toward surplus.
B) tax revenue decreases and social welfare spending increases, swinging the cash budget toward deficit.
C) tax revenue decreases and social welfare spending decreases, swinging the cash budget toward deficit.
D) tax revenue increases and social welfare spending increases, swinging the cash budget toward surplus.

Question 28

When real GDP increases and unemployment decreases

A) tax revenue increases and social welfare spending decreases, swinging the cash budget toward surplus.
B) tax revenue decreases and social welfare spending increases, swinging the cash budget toward deficit.
C) tax revenue decreases and social welfare spending decreases, swinging the cash budget toward deficit.
D) tax revenue increases and social welfare spending increases, swinging the cash budget toward surplus.

Question 29

Each of the following are further adjustments that need to be made to the reported cash budget level except

A) an adjustment for inflation.
B) an adjustment for public investment.
C) an adjustment for public consumption.
D) an adjustment for future liabilities and generational accounting.

Question 30

The real interest that government pays on its debt

A) is equal to the nominal interest rate times the debt (i x D).
B) is equal to the nominal interest rate times the cash deficit (i x d^c).
C) is equal to the real interest rate times the cash deficit (r x d^c).
D) is equal to the real interest rate times the debt (r x D).

Question 31

The real deficit (d^r)

A) is equal to the cash deficit minus the inflation rate (d^c - B).
B) is equal to the cash deficit minus the inflation rate times debt (d^c - B x D).
C) is equal to the cash deficit plus the inflation rate times debt (d^c + B x D).
D) is equal to the cash deficit plus the inflation rate (d^c + B).

Question 32

Economists suggest that governments should adopt capital budgeting because

A) the cost of capital goods should be amortized over a period of time rather than completely charged to the budget when incurred.
B) the cost of consumption goods should be amortized over a period of time rather than completely charged to the budget when incurred.
C) the federal government is located in Washington,
D) the true debt is understated unless capital budgeting is used.

Question 33

Fiscal policy is sustainable if

A) the debt-to-money supply ratio is heading for a steady state.
B) the debt-to-government spending ratio is heading for a steady state.
C) the debt-to GDP ratio is heading for a steady state.
D) the deficit-to-debt ratio is heading toward a steady state.

Question 34

In an economy with a constant cash deficit d, a long-run inflation rate , and long-run real GDP growth rate n + g, the equilibrium debt-to-GDP ratio is

A) (d/Y) / n + g + $\pi$ ).
B) (d/Y) /(n + g + $\pi$ ).
C) (d/Y) /(n + g - $\pi$ ).
D) (d/Y) /(n + g - $\pi$ ).

Question 35

In an economy with a constant cash deficit of 3 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

A) the equilibrium debt-to-GDP ratio would be 3/5.
B) the equilibrium debt-to-GDP ratio would be 1.
C) the equilibrium deficit-to-GDP ratio would be 3/5.
D) the equilibrium deficit-to-GDP ratio would be 1.

Question 36

In an economy with a constant cash deficit of 4 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

A) the equilibrium deficit-to-GDP ratio would be 4/5.
B) the equilibrium debt-to-GDP ratio would be 4/3.
C) the equilibrium debt-to-GDP ratio would be 4/5.
D) the equilibrium deficit-to-GDP ratio would be 4/3.

Question 37

If the cash deficit-to-GDP ratio increases,

A) the equilibrium debt-to-GDP ratio will decrease.
B) the equilibrium deficit-to-GDP ratio will decrease.
C) the equilibrium debt-to-GDP ratio will increase.
D) the equilibrium deficit-to-GDP ratio will increase.

Question 38

If the labor force growth rate increases,

A) the equilibrium debt-to-GDP ratio will decrease.
B) the equilibrium deficit-to-GDP ratio will decrease.
C) the equilibrium debt-to-GDP ratio will increase.
D) the equilibrium deficit-to-GDP ratio will increase.

Question 39

If the cash deficit-to-GDP ratio decreases,

A) the equilibrium debt-to-GDP ratio will decrease.
B) the equilibrium deficit-to-GDP ratio will decrease.
C) the equilibrium debt-to-GDP ratio will increase.
D) the equilibrium deficit-to-GDP ratio will increase.

Question 40

If the labor force growth rate decreases,

A) the equilibrium debt-to-GDP ratio will decrease.
B) the equilibrium deficit-to-GDP ratio will decrease.
C) the equilibrium debt-to-GDP ratio will increase.
D) the equilibrium deficit-to-GDP ratio will increase.

Question 41

If the inflation rate increases,

A) the equilibrium deficit-to-GDP ratio will decrease.
B) the equilibrium debt-to-GDP ratio will decrease.
C) the equilibrium deficit-to-GDP ratio will increase.
D) the equilibrium debt-to-GDP ratio will increase.

Question 42

If the inflation rate decreases,

A) the equilibrium deficit-to-GDP ratio will decrease.
B) the equilibrium debt-to-GDP ratio will decrease.
C) the equilibrium deficit-to-GDP ratio will increase.
D) the equilibrium debt-to-GDP ratio will increase.

Question 43

The higher the debt-to-GDP ratio,

A) the less risky an investment do financiers judge the debt of the country and the less willing they will be to buy and hold that debt.
B) the more risky an investment do financiers judge the debt of the country and the less willing they will be to buy and hold that debt.
C) the less risky an investment do financiers judge the debt of the country and the more willing they will be to buy and hold that debt.
D) the more risky an investment do financiers judge the debt of the country and the more willing they will be to buy and hold that debt.

Question 44

The higher the debt-to-GDP ratio,

A) the less risky an investment do financiers judge the debt of the country, reducing the interest rate that governments will have to pay to convince people to buy and hold the debt.
B) the more risky an investment do financiers judge the debt of the country, reducing the interest rate that governments will have to pay to convince people to buy and hold the debt.
C) the less risky an investment do financiers judge the debt of the country, increasing the interest rate that governments will have to pay to convince people to buy and hold the debt.
D)the more risky an investment do financiers judge the debt of the country, increasing the interest rate that governments will have to pay to convince people to buy and hold the debt.

Question 45

The lower the debt-to-GDP ratio,

A) the less risky an investment do financiers judge the debt of the country and the less willing they will be to buy and hold that debt.
B) the more risky an investment do financiers judge the debt of the country and the less willing they will be to buy and hold that debt.
C) the less risky an investment do financiers judge the debt of the country and the more willing they will be to buy and hold that debt.
D) the more risky an investment do financiers judge the debt of the country and the more willing they will be to buy and hold that debt.

Question 46

The lower the debt-to-GDP ratio,

A) the less risky an investment do financiers judge the debt of the country, reducing the interest rate that governments will have to pay to convince people to buy and hold the debt.
B) the more risky an investment do financiers judge the debt of the country, reducing the interest rate that governments will have to pay to convince people to buy and hold the debt.
C) the less risky an investment do financiers judge the debt of the country, increasing the interest rate that governments will have to pay to convince people to buy and hold the debt.
D) the more risky an investment do financiers judge the debt of the country, increasing the interest rate that governments will have to pay to convince people to buy and hold the debt.

Question 47

The higher the debt-to-GDP ratio,

A) the more likely is the government to resort to inflation as a means to reduce the real burden of the debt.
B) the less likely is the government to resort to inflation as a means to reduce the real burden of the debt.
C) the more likely is the government to resort to inflation as a means to increase the real burden of the debt.
D) the less likely is the government to resort to inflation as a means to increase the real burden of the debt.

Question 48

A deficit is sustainable only if

A) the associated equilibrium debt-to-GDP ratio is high enough to attract risk adverse investors.
B) the associated equilibrium debt-to-GDP ratio is low enough that investors judge the debt safe enough to buy and hold.
C) the associated equilibrium debt-to-GDP ratio is high enough that investors judge the debt safe enough to buy and hold.
D) it is equal to zero.

Question 49

Each of the following is a possible effect of budget deficit except

A) the deficit may affect the political equilibrium that determines the government's tax and spending levels.
B) the deficit may affect the level of real GDP in the short run.
C) the deficit may affect the level of real GDP in the long run.
D) the deficit may affect the natural rate of inflation in the long-run.

Question 50

The United States debt-to-GDP ratio reached its highest level in history

A) during the Civil War.
B) during the 1980s.
C) during World War II.
D) during the 1990s.

Question 51

The United States debt-to-GDP ratio reached its lowest level in history

A) during the 1980s.
B) during the 1830s.
C) during the 1890s.
D) during the 1990s.

Question 52

The only three time periods in which the upward movement in the debt-to-GDP ratio was not associated with a war were

A) the 1970s during the Carter presidency, the 1990s during the Clinton presidency, and the 1980s during the Reagan and Bush 41 presidencies.
B) the 1940s during the Truman presidency, the 1950s during the Eisenhower presidency, and the 1970s during the Carter presidency.
C) the Great Depression during the 1930s, the 1980s during the Reagan and Bush 41presidencies, and during the Bush 43 presidency.
D) the Great Depression during the 1930ss and the 1940s during the Truman presidency, the 1970s during the Carter presidency.

Question 53

The almost doubling of the debt-to-GDP ration during the Reagan presidency was due in part to each of the following except

A) higher spending on defense and other programs.
B) substantially higher spending on social welfare programs that primarily benefit low-income persons.
C) substantial tax cuts.
D) the productivity slowdown.

Question 54

Each of the following was a factor in bringing the rise in the debt an end except

A) President Bush's economic advisors and the Democratic and Republican Congressional leaders who negotiated a serious deficit-reduction program in 1990.
B) President Clinton, his economic advisors, and the Democratic members of Congress who made deficit reduction the highest priority of his administration in 1993.
C) President Bush's economic advisors and the Democratic and Republican Congressional leaders who negotiated a serious debt-reduction program in 1990.
D) a healthy dose of good macroeconomic luck.

Question 55

Each of the following is a potential destructive political consequence of government budget deficits except

A) the possibility of financing government spending through borrowing makes government less effective at advancing the public welfare.
B) the benefits from higher government spending now are clear and visible to voters, but the costs of the higher taxes needed to finance the debt built up via deficit spending are excessively discounted.
C) many of those who are being obligated to pay taxes in the future do not vote today.
D) many of those who receive benefits today do not vote.

Question 56

In the short-run, a government budget deficit produced by a tax cut

A) increases consumption spending and shifts the LM curve to the right.
B) increases consumption spending and shifts the IS curve to the right.
C) decreases consumption spending and shifts the LM curve to the left.
D) decreases consumption spending and shifts the IS curve to the left.

Question 57

In the short-run, the effect on real GDP of a government budget deficit produced by a tax cut will be neutralized if

A) the Federal Reserve loosens monetary policy, which shifts the LM curve to the right and lowers real interest rates.
B) the Federal Reserve tightens monetary policy, which shifts the IS curve to the left and raises real interest rates.
C) the Federal Reserve tightens monetary policy, which shifts the LM curve to the left and raises real interest rates.
D) the Federal Reserve loosens monetary policy, which shifts the IS curve to the right and raises real interest rates.

Question 58

In the short-run, a government budget surplus produced by tax increases

A) increases consumption spending and shifts the LM curve to the right.
B) increases consumption spending and shifts the IS curve to the right.
C) decreases consumption spending and shifts the LM curve to the left.
D) decreases consumption spending and shifts the IS curve to the left.

Question 59

In the short-run, the effect on real GDP of a government budget surplus produced by a tax increase will be neutralized if

A) the Federal Reserve loosens monetary policy, which shifts the LM curve to the right and lowers real interest rates.
B) the Federal Reserve tightens monetary policy, which shifts the IS curve to the left and raises real interest rates.
C) the Federal Reserve tightens monetary policy, which shifts the LM curve to the left and raises real interest rates.
D) the Federal Reserve loosens monetary policy, which shifts the IS curve to the right and raises real interest rates.

Question 60

An increase in the government's budget deficit

A) will lead to a decrease in imports, a depreciated dollar, an increase in exports, and a decrease in the international trade deficit.
B) will lead to an increase in imports, an appreciated dollar, a decrease in exports, and an increase in the international trade deficit.
C) will lead to an increase in imports, a depreciated dollar, an increase in exports, and an uncertain effect on the international trade deficit.
D) will lead to a decrease in imports, an appreciated dollar, a decrease in exports, and an uncertain effect on the international trade deficit.

Question 61

A decrease in the government's budget deficit

A) will lead to a decrease in imports, a depreciated dollar, an increase in exports, and a decrease in the international trade deficit.
B) will lead to an increase in imports, an appreciated dollar, a decrease in exports, and an increase in the international trade deficit.
C) will lead to an increase in imports, a depreciated dollar, an increase in exports, and an uncertain effect on the international trade deficit.
D) will lead to a decrease in imports, an appreciated dollar, a decrease in exports, and an uncertain effect on the international trade deficit.

Question 62

Higher full-employment deficits

A) reduce total savings, raise real interest rates, and reduce consumption spending.
B) increase total savings, lower real interest rates, and increase consumption spending.
C) increase total savings, lower real interest rates, and increase investment spending.
D) reduce total savings, raise real interest rates, and decrease investment spending.

Question 63

Lower full-employment deficits

A) reduce total savings, raise real interest rates, and reduce consumption spending.
B) increase total savings, lower real interest rates, and increase consumption spending.
C) increase total savings, lower real interest rates, and increase investment spending.
D) reduce total savings, raise real interest rates, and decrease investment spending.

Question 64

Higher full-employment deficits

A) shift the IS curve to the right, raise real interest rates, and reduce consumption spending.
B) shift the IS curve to the right, raise real interest rates, and reduce investment spending.
C) shift the IS curve to the left, lower interest rates, and increase investment spending.
D) shift the IS curve to the left, lower interest rates, and increase consumption spending.

Question 65

Lower full-employment deficits

A) shift the IS curve to the right, raise real interest rates, and reduce consumption spending.
B) shift the IS curve to the right, raise real interest rates, and reduce investment spending.
C) shift the IS curve to the left, lower interest rates, and increase investment spending.
D) shift the IS curve to the left, lower interest rates, and increase consumption spending.