Deck 12: Deficits and Debt

Question 1

Which of the following is an appropriate fiscal policy prescription for the government to follow?

A)Deficit reduction during a recession.
B)Deficit reduction when there is excess AD.
C)Deficit expansion in an inflationary gap.
D)Deficit reduction during a war.

Answer 1

Deficit reduction when there is excess AD.

Question 2

The fiscal year

A)Is the 12-month period used for federal government accounting purposes.
B)Begins in January for the federal government.
C)Is the period during which the government must balance the budget.
D)None of the choices are correct.

Answer 2

Is the 12-month period used for federal government accounting purposes.

Question 3

Which of the following represents the use of fiscal policy to achieve a fiscal stimulus?

A)Greater government expenditure or lower taxes.
B)Greater government expenditure or higher taxes.
C)Lower government expenditure or lower taxes.
D)Lower government expenditure or higher taxes.

Answer 3

Greater government expenditure or lower taxes.

Question 4

Deficit spending results whenever the government

A)Issues bonds to finance the debt.
B)Finances current expenditures that exceed current tax revenues.
C)Refinances the debt.
D)None of the choices are correct.

Question 5

When there is excess aggregate demand,the appropriate fiscal policy would be for the government to

A)Make budget surpluses smaller.
B)Make budget surpluses larger.
C)Make budget deficits larger.
D)Increase the public debt.

Question 6

Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?

A)More government expenditure and higher taxes.
B)More government expenditure and lower taxes.
C)Less government expenditure and higher taxes.
D)Less government expenditure and lower taxes.

Question 7

With greater deficit spending,ceteris paribus,

A)Aggregate spending should fall.
B)Any inflationary gap will become larger.
C)There are greater leakages.
D)There is inadequate information to tell what happens to aggregate spending.

Question 8

In order to reduce the U.S.debt,

A)The government must use deficit spending.
B)The government should spend less than it collects in tax revenues.
C)There will be a transfer of revenue from bondholders to taxpayers.
D)Foreign governments must lend more money to the U.S. government.

Question 9

If full-employment output exceeds equilibrium output,greater deficit spending will result in a

A)Smaller recessionary gap.
B)Smaller inflationary gap.
C)Larger recessionary gap.
D)None of the choices are correct.

Question 10

A budget surplus is

A)An excess of government spending over government revenues in a given time period.
B)An excess of government revenues over government expenditures in a given time period.
C)Used only in time of war.
D)None of the choices are correct.

Question 11

If full-employment income and equilibrium income are equal for a country,then a tax cut will result in

A)Excess AD.
B)Output exceeding desired expenditure.
C)Leakages exceeding injections.
D)Undesired inventory accumulation.

Question 12

Discretionary expenditures account for approximately

A)One-fifth of the federal budget.
B)One-half of the federal budget.
C)One-third of the federal budget.
D)Three-fourths of the federal budget.

Question 13

If the economy is in a recession,

A)It is operating inside the production possibilities curve,and the opportunity cost of deficit spending is zero.
B)Deficit spending will not increase the size of the debt because interest rates will be falling.
C)The economy suffers from structural unemployment,which can be alleviated by debt refinancing.
D)Larger deficits will decrease the national debt.

Question 14

Much of each year's federal budget is considered "uncontrollable" because

A)It must be spent for purchases,as opposed to transfer payments.
B)Most of the current revenues and expenditures are the result of decisions made in prior years.
C)It is determined by decision makers who do not have the power to change spending and taxes.
D)None of the choices are correct.

Question 15

Which of the following is an argument against balancing the federal budget?

A)The federal government interferes with the economy too much.
B)An increase in government spending and taxes by the same amount does not affect income.
C)Doing so may prevent the government from pulling the economy out of recession.
D)None of the choices are correct.

Question 16

Uncontrollable government spending includes

A)Interest payments on the national debt.
B)Spending decisions made in the current year.
C)Approximately half of the government spending in the United States.
D)Welfare benefits but not unemployment benefits.

Question 17

In order to maintain a balanced budget every year,during a recession the government would have to

A)Decrease the money supply.
B)Increase the money supply.
C)Decrease spending or increase taxes or both.
D)Increase spending or decrease taxes or both.

Question 18

Which of the following is true about the U.S.federal government budget for the year 1998?

A)The U.S.Constitution was amended to require a balanced federal budget.
B)The federal budget deficit was the largest in history.
C)Federal government receipts were greater than federal government spending for the first time in more than 25 years.
D)Federal government outlays were greater than federal government receipts for the first time in more than 25 years.

Question 19

The elements of the federal budget not determined by past legislative or executive commitments are

A)Uncontrollable fiscal spending.
B)Fiscal restraint items.
C)Discretionary fiscal spending.
D)Automatic stabilizers.

Question 20

The use of government taxes and spending to alter economic outcomes is known as

A)Monetary policy.
B)Fiscal policy.
C)Incomes policy.
D)Foreign trade policy.

Question 21

A decrease in private sector borrowing and spending caused by increased government borrowing is

A)Crowding in.
B)Crowding out.
C)Fiscal stimulus.
D)The GDP gap.

Question 22

The structural deficit represents

A)Federal revenues minus federal expenditures at full employment under current fiscal policy.
B)Federal revenues minus expenditures under current fiscal policy at current output.
C)A measure of the size of recessionary or inflationary gaps.
D)The difference between expenditures at full employment and expenditures at cyclical unemployment.

Question 23

For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy,the actual deficit is divided into which of the following components?

A)Automatic stabilizers and autonomous consumption.
B)C,I,G,X,and M.
C)Structural and cyclical deficits.
D)Frictional and seasonal deficits.

Question 24

Automatic stabilizers

A)Are included in discretionary fiscal spending.
B)Cause spending to decrease during a recession.
C)Help to moderate the extremes of the business cycle.
D)Are zero at full employment.

Question 25

An increase in unemployment,ceteris paribus,

A)Leads to decreased government expenditures.
B)Leads to increased government revenues.
C)Reduces a budget surplus.
D)Reduces a budget deficit.

Question 26

Which of the following results from a change in the business cycle,ceteris paribus?

A)Frictional unemployment.
B)Cyclical unemployment.
C)Structural unemployment.
D)Structural deficit.

Question 27

The largest percentage of U.S.national debt to GDP occurred during

A)The Civil War.
B)World War I.
C)World War II.
D)The Great Depression.

Question 28

In contrast to the structural deficit,the cyclical deficit reflects

A)Fluctuations in economic activity.
B)Fiscal policy decisions.
C)Changes in discretionary fiscal policy.
D)Changes in the "full-employment" deficit.

Question 29

Which of the following is an automatic stabilizer that reduces tax receipts during a recession?

A)Welfare benefits.
B)Medicaid.
C)Corporate and individual income taxes.
D)Indexed retirement and Social Security benefits.

Question 30

A progressive income tax system is particularly effective as an automatic stabilizer because

A)It reduces demand when income falls.
B)In a booming economy,taxpayers move into higher tax brackets,which restrains their spending.
C)During a recession,it causes the budget deficit to fall.
D)It falls more heavily on taxpayers with high MPCs, which stimulates aggregate demand.

Question 31

Spending for unemployment compensation and welfare benefits increase automatically

A)When the economy expands.
B)When the economy goes into recession.
C)When voters make the decision to increase these items.
D)Only when the fiscal year begins.

Question 32

Automatic stabilizers tend to stabilize the level of economic activity because they

A)Are changed quickly by Congress.
B)Increase the size of the multiplier.
C)Increase spending during recessions and reduce spending during inflationary periods.
D)Control the rate of change in prices.

Question 33

If the cyclical deficit shrank by $60 billion while the structural deficit increased by $35 billion,the total deficit

A)Fell by $25 billion.
B)Grew by $25 billion.
C)Grew by $95 billion.
D)Fell by $60 billion.

Question 34

Fiscal restraint is

A)Tax hikes and/or spending cuts intended to reduce aggregate demand.
B)Changes in taxes and spending intended to increase aggregate supply.
C)Tax cuts or spending increases meant to reduce aggregate demand.
D)Not possible because Congress continues to spend too much money.

Question 35

Which of the following is most likely to increase a federal budget surplus?

A)A higher inflation rate and a higher unemployment rate.
B)A higher inflation rate and a lower unemployment rate.
C)A lower inflation rate and a higher unemployment rate.
D)A lower inflation rate and a lower unemployment rate.

Question 36

If the budget deficit for each year is held to a constant nominal value during constant inflationary times,then the inflation-corrected or real value of the total debt would

A)Rise at a decreasing rate.
B)Rise at a constant rate.
C)Begin to fall,but then continually rise.
D)Initially rise but eventually would become negative.

Question 37

Which of the following is most likely to reduce a federal budget surplus?

A)A booming economy with rising inflation rates.
B)A recession.
C)Higher inflation and higher unemployment rates.
D)Lower inflation and lower unemployment rates.

Question 38

If the total budget deficit is $200 billion and the deficit at full employment is $120 billion,then the

A)Cyclical deficit is $120 billion.
B)Cyclical deficit is $80 billion.
C)Structural deficit is $320 billion.
D)Structural deficit is $80 billion.

Question 39

Suppose the economy is at a full-employment GDP of $1 trillion and the tax revenue received by the federal government is always one-fifth of GDP.If planned government expenditure is $300 billion,the structural

A)Deficit is zero.
B)Deficit is $100 billion.
C)Surplus is $100 billion.
D)Deficit is $500 billion.

Question 40

All of the following contribute to greater deficits when unemployment rises and reduce the deficit during an inflationary gap except for

A)U.S.exports.
B)Welfare benefits.
C)Progressive personal income taxes.
D)Unemployment insurance benefits.

Question 41

The debt would cease to grow if

A)The federal government balanced its budget.
B)Federal expenditures were greater than federal receipts.
C)Interest rates fell.
D)None of the choices are correct.

Question 42

If there was a federal budget surplus and the government decided to either increase spending or decrease taxes,

A)The budget surplus would get smaller.
B)The budget surplus would get larger.
C)The budget surplus would remain unchanged.
D)None of the choices are correct.

Question 43

The national debt is

A)The amount by which tax revenues exceed government spending for a given year.
B)The accumulation of all annual deficit and surplus flows.
C)The amount by which government spending exceeds tax revenues for a given year.
D)A fairly risky asset that pays interest.

Question 44

An obligation to make future payment is

A)Debt refinancing.
B)Debt service.
C)A liability.
D)An asset.

Question 45

The U.S.government incurred a national debt for the first time during

A)World War II.
B)Ronald Reagan's presidency.
C)The Revolutionary War.
D)The Great Depression.

Question 46

Debt accumulation by the U.S.government in the 1980s:

A)Was small compared with earlier periods of history.
B)Exceeded the debt the country had accumulated over the preceding 200 years.
C)Was caused by war-related expenditures.
D)None of the choices are correct.

Question 47

In the 20th century,the ratio of the U.S.debt to GDP has

A)Risen in response to wars.
B)Been inversely related to the deficit to GDP ratio.
C)Fallen during wartime compared with prewar levels.
D)Fallen to its lowest levels during recessions or depressions.

Question 48

The fiscal agent of the U.S.government is the

A)U.S.Treasury.
B)Federal Reserve System.
C)Securities and Exchange Commission.
D)Congress.

Question 49

Increased government purchases crowd out private purchases whenever the economy is

A)Experiencing an AD shortfall.
B)On the production possibilities curve.
C)Facing serious cyclical unemployment.
D)Operating below full employment.

Question 50

The U.S.federal debt that accumulated between 1970 and 2010

A)Caused significant economic damage to the U.S.economy.
B)Is an asset and a liability for the U.S.economy.
C)Occurred at the expense of the foreign sector.
D)Occurred without an increase in the size of the government sector.

Question 51

Which of the following would occur if the federal government decided to use a budget surplus to reduce the existing debt?

A)Crowding out and public sector output would increase.
B)Crowding out and public sector output would decrease.
C)Crowding in and private sector output would increase.
D)Crowding in and private sector output would decrease.

Question 52

An increase in private sector borrowing and spending caused by decreased government borrowing is known as

A)Crowding out.
B)Crowding in.
C)Crowding debt.
D)Debt reduction.

Question 53

An opportunity cost that occurs because of increased government spending is

A)Congressional disagreements.
B)The crowding in of public sector investment.
C)The crowding out of private sector output.
D)An increase in private sector investment.

Question 54

Which of the following best describes the federal budget during the 1990s?

A)The absolute size of the deficit fell.
B)The relative size of the deficit fell.
C)The absolute size of the debt grew to over $5 trillion.
D)There was a steady downward trend in the relative size of the deficit.

Question 55

For the United States,from the 1980s to today,there has been an increase in both absolute size and relative size (relative to GDP)for the federal government in

A)The deficit and the debt.
B)The deficit,but not the debt.
C)The debt,but not the deficit.
D)Neither the deficit nor the debt.

Question 56

Policies designed to pay off the national debt will result in:

A)A higher level of aggregate demand.
B)A redistribution of income but not wealth.
C)A smaller level of aggregate demand
D)Inflation.

Question 57

Crowding in is the result of

A)Falling interest rates.
B)Declining business confidence.
C)Rising unemployment.
D)Rising government borrowing.

Question 58

When the Federal Reserve System buys bonds in the open market,the national debt

A)Must increase.
B)Must increase as long as the Fed buys only newly issued bonds.
C)Is not affected.
D)Will decrease because the Fed is a government agency.

Question 59

A measure of the burden of continual deficit financing over time is the ratio of

A)The deficit to the GDP.
B)The debt to the GDP.
C)The deficit to the debt.
D)Tax revenues to the debt.

Question 60

The opportunity cost of the debt is

A)The interest payments on the debt.
B)Less of an issue if the economy is below full employment since crowding out is less likely to occur.
C)Not an issue if the debt is financed internally.
D)The decrease in public sector output because of government borrowing.

Question 61

The "real burden" of the debt is directly related to

A)The idea of opportunity cost.
B)The difference between internally held debt and externally held debt.
C)The relationship between the Treasury and the Federal Reserve System.
D)How transfers redistribute income.

Question 62

The burden of the internal portion of the debt is incurred

A)When the debt-financed activity takes place.
B)Solely by the U.S.government.
C)When the debt comes due.
D)None of the choices are correct.

Question 63

Which of the following owns the largest portion of the U.S.national debt?

A)Foreigners.
B)The federal government.
C)The private sector.
D)State and local governments.

Question 64

Federal agencies hold roughly _____ percent of all outstanding Treasury bonds.

A)50
B)66
C)30
D)16

Question 65

Which of the following statements about the U.S.national debt is not correct?

A)The primary economic costs of the debt are being passed on to future generations.
B)The primary burden of the debt is incurred when the deficit-financed activity takes place.
C)The national debt represents both a liability and asset to future generations.
D)Future generations will bear some of the debt burden when crowding out occurs.

Question 66

When the U.S.Treasury issues new bonds to replace bonds that have matured,it is engaging in

A)Debt refinancing.
B)Debt servicing.
C)Income transfers.
D)Discretionary fiscal spending.

Question 67

The largest single holder of the U.S.national debt after the U.S.government is

A)The foreign sector.
B)The private sector.
C)U.S.businesses.
D)None of the choices are correct.

Question 68

If debt-financed less productive government spending crowds out more productive private investment,future generations will bear

A)All of the burden of the debt due to higher taxes.
B)Zero burden as a result of the debt.
C)Some of the burden of the debt due to lower productive capacity.
D)A portion of the burden of the debt relative to the population size.

Question 69

At the time it occurs,external financing of the debt allows the economy to

A)Consume beyond the production possibilities curve.
B)Reduce the deficit ceiling.
C)Export more goods and services.
D)Reduce the size of the national debt.

Question 70

The Gramm-Rudman-Hollings Act of 1985 created a

A)Deficit ceiling.
B)Debt ceiling.
C)Mandated balanced budget by 2005.
D)Prohibition against external financing of the debt.

Question 71

Interest payments on the national debt

A)Make it easier for the government to balance the national budget.
B)Are a redistribution of income from taxpayers to bondholders.
C)Have high opportunity costs.
D)Are the "real burden" of the debt.

Question 72

The burden of the debt is passed on to future generations when the debt is held by

A)Foreign households.
B)U.S.households.
C)U.S.corporations.
D)State and local governments.

Question 73

If deficit spending does not contribute to public investment and crowds out private investment,then

A)The rate of economic growth will decline,ceteris paribus.
B)The current generation will bear the total burden of the debt.
C)Future productive capacity will be enhanced.
D)The opportunity cost of the debt will be minimized.

Question 74

Internal ownership of the national debt occurs when U.S.Treasury bonds are purchased by all of the following except

A)Foreign countries that we trade with.
B)The Social Security Administration.
C)The Federal Reserve System.
D)Individual U.S. citizens.

Question 75

Foreign households and institutions hold approximately _____ percent of the U.S.national debt.

A)50
B)31
C)45
D)8

Question 76

The cost of servicing the debt may increase if

A)The debt shrinks.
B)Deficits become smaller.
C)Interest rates rise.
D)The debt is held internally.

Question 77

A deficit ceiling directly limits

A)The rate at which government spending can exceed government revenue.
B)The amount of the national debt.
C)The trade deficit.
D)Inflation.

Question 78

Debt service

A)Refers to the annual interest payments on the debt.
B)Is a discretionary component of the federal budget.
C)Does not cost the government because it can issue new debt.
D)Is a redistribution, so it does not entail opportunity costs.

Question 79

Which of the following is not an explanation of why the Gramm-Rudman-Hollings Act proved inadequate in reducing the deficit?

A)The Supreme Court declared the automatic mechanism for budget cuts unconstitutional.
B)Congress wasn't willing to cut spending enough.
C)Congress controls only the cyclical portion of government spending.
D)Congress wasn't willing to increase taxes enough.

Question 80

Selling bonds to finance new government debt leads to an opportunity cost that is

A)Less than when government debt is financed with taxes.
B)Greater than when government debt is financed with taxes.
C)The same as financing government debt with taxes.
D)Dependent on who buys the bonds.