Deck 10: Balancing the Federal Budget: Should We Be Worried About the Rising Federal Deficit

Question 1

The share of interest as a percent of GDP

A) is at an all time high.
B) peaked in 1990 and has been trending downward.
C) continues to absorb an ever increasing share of GDP.
D) None of the above.

Answer 1

B

Question 2

Excess-demand inflation, according to the Conservative scenario

A) lowers inflation-adjusted income and increases the demand for goods.
B) lowers inflation-adjusted income and decreases the demand for goods.
C) increases nominal income and increases the demand for goods.
D) decreases nominal income and decreases the demand for goods.

Answer 2

B

Question 3

The Gramm-Rudman-Hollings Act of 1985 sought to

A) punish foreign industries for "dumping" goods into American markets.
B) raise the minimum wage.
C) reduce government spending in order to balance the federal budget by 1991.
D) raise taxes on wealthy individuals.

Answer 3

C

Question 4

Below the full-employment level of output, expansionary fiscal policy causes private investment to rise, thus increasing output and creating new investment opportunities. This Liberal concept is known as the

A) crowding-in effect.
B) crowding-out effect.
C) trickle-down effect.
D) multiplier effect.

Question 5

Deficits matter to Liberals because they

A) provide a useful tool for economic management.
B) always lead to inflation.
C) slow decision-making processes.
D) create an artificially "strong" dollar, which increases GDP.

Question 6

Conservative fiscal policy includes all of the following except

A) large increases in military spending.
B) increasing the share of social spending as a share of GDP.
C) personal tax cuts.
D) business tax cuts.

Question 7

In the early 1980s, to stimulate the economy, supply-siders wanted

A) a reduction in taxes.
B) limits on monopoly power to insure "pure competition."
C) a constant growth rate rule for wages.
D) job protection programs to keep employment levels high.

Question 8

Compared to the 1990s, debt as a share of GDP in the 1980s was

A) lower.
B) higher.
C) about the same.
D) None of the above.

Question 9

During the 1980s, the nominal value of public debt

A) approximately tripled.
B) grew as a share of GDP.
C) required interest payments that more than doubled as a share of GDP.
D) All of the above.
E) None of the above.

Question 10

An example of crowding-out would be the

A) demand-pull inflation government spending creates.
B) loss of private investment resulting from federal deficits reducing the availability of loan funds.
C) impact of social spending competing with military spending.
D) way in which federal spending squeezes out state and local government spending.

Question 11

Conservatives explain the big deficits of the 1980s as the result of

A) Congressional unwillingness to cut taxes.
B) the trade deficit.
C) Congress's inability to cut social spending.
D) the deep stagflation of this period.

Question 12

Which group is most often identified with the following statement: "Borrowing creates 'too many dollars chasing too few goods.'"

A) Conservatives.
B) Liberals.
C) Radicals.
D) None of the above.

Question 13

Radicals claim that

A) neither deficit spending nor budget balancing produces any long-term answers to the capitalist economy.
B) deficits can be a useful tool for economic management if used judiciously.
C) a balanced budget is necessary to keep inflation under control.
D) induced recessions are necessary to spur further growth in the economy.

Question 14

Functional finance refers to the concept that

A) economics cannot be "fine-tuned' under any system of government.
B) the budget should be kept as close to balanced as possible.
C) shows no real concern for budget balance.
D) places limitations on the size and use of deficits.

Question 15

According to the Radical view, the growth of public as well as private debt is important as it

A) shows a dangerous shift in trends toward underconsumption.
B) puts pressure on the Federal Reserve to tighten monetary policy.
C) reflects the new attitudes of the current younger generation.
D) is a reflection of capitalism's inability to realize surplus value.

Question 16

According to the Liberal paradigm, cyclical deficits differ from structural deficits in that they

A) arise from the normal business cycle.
B) are caused by wartime expenditures.
C) pose a significant threat to financial markets.
D) None of the above.

Question 17

Conservatives hold to the view--as evidenced by the tripling of the federal debt during the 1980s--that "deficits do not matter."

Question 18

Liberals oppose a balanced budget amendment to the Constitution because it would limit the discretionary use of fiscal policy.

Question 19

Radicals do not limit their focus on "the debt question" to the federal debt, but point out that the problems associated with the growth in private debt are much more serious.

Question 20

Private debt has grown faster than government debt.

Question 21

Debt has been overstated as a current economic problem because GDP has grown much faster since 1980.

Question 22

Conservatives claim that government borrowing, even when it may crowd out some private investment, generally has a favorable effect on the productive base of the economy.

Question 23

Prior to the stagflation of the 1970s, Liberals proclaimed that deficit spending produced inflation, rising interest rates, and decreased investment.

Question 24

Conservatives favor a balanced budget in all but emergency situations, and they fail to differentiate the sources of deficits.

Question 25

Crowding out can only exist--according to Liberals--when the economy is at full employment, and all productive resources are being utilized.

Question 26

Liberals agree that the use of deficit spending can instead be deemed "misuse," as in the case of the Reagan years.

Question 27

Liberals argue that the implementation of a balanced-budget amendment will neutralize federal fiscal policy, and will leave the economy susceptible to changes in the business cycle.

Question 28

Liberal economic theory asserts that under balanced-budget conditions, an economic expansion could become inflationary as higher tax revenues would be used to finance greater than expected public expenditures.

Question 29

Radicals argue that balancing the federal budget will greatly reduce debt-driven aggregate demand.

Question 30

According to the Radical position, reducing demand by decreasing the federal deficit will not induce businesses to increase investment, modernize production, or decrease costs.

Question 31

Conservatives claim that the doubling of the Federal debt during Ronald Reagan's administration was largely due to a Liberal congress that failed to cut spending during his tenure.