Deck 5: The Government Budget, Foreign Borrowing, and the Twin Deficits

Question 1

Figure 5-1
In the figure above, if the budget line is BB0 and the natural real GDP is $5300, the structural surplus or deficit is

A) FC.
B) AD.
C) FA.
D) none of the above.

Answer 1

FC.

Question 2

A deliberate change in the government's deficit

A) constitutes discretionary fiscal policy.
B) leads to automatic stabilization.
C) acts as a drag on the economy.
D) is implemented by the Fed.

Answer 2

constitutes discretionary fiscal policy.

Question 3

Figure 5-1
In the figure above, the impact of automatic stabilization is depicted by the movement from

A) A to F.
B) A to B.
C) A to C.
D) D to A.

Answer 3

A to B.

Question 4

Figure 5-1
Employing the government budget diagram shown in the figure above, assume that the economy is initially in equilibrium at point A. The movement A to D represents

A) an increase in government spending and/or a decrease in taxes.
B) a decrease in government spending and/or an increase in taxes.
C) a decrease in government spending and a decrease in taxes.
D) an increase in government spending and an increase in taxes.

Question 5

The natural employment deficit ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A) cannot; it excludes non-discretionary spending changes
B) can; it includes non-discretionary spending changes
C) cannot; it includes non-discretionary spending changes
D) can; it excludes automatic stabilization expenditures

Question 6

The three ways of reducing a government budget deficit are to

A) decrease government spending, reduce consumption, increase the tax rate.
B) increase government spending, decrease real income, reduce the tax rate.
C) decrease government spending, increase real income, reduce the tax rate.
D) decrease government spending, increase real income, increase the tax rate.

Question 7

The natural employment surplus ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A) cannot; it excludes non-discretionary spending changes
B) can; it includes non-discretionary spending changes
C) cannot; it includes non-discretionary spending changes
D) can; it excludes automatic stabilization expenditures

Question 8

During the fiscal expansion associated with the Vietnam war, what type of expenditures was initially "crowded out?"

A) autonomous consumption
B) nonresidential fixed investment
C) residential construction
D) nonresidential construction

Question 9

Which of the following effects takes place as a result of automatic stabilization?

A) extra tax revenues are generated in a boom
B) tax revenues remain constant during a recession
C) leakages increase during a recession, helping to stimulate the economy
D) Both A and C are correct.

Question 10

Persistent government budget deficit result in ________ taxes and a ________ stock of capital in the future.

A) higher, larger
B) lower, larger
C) higher, smaller
D) lower, smaller

Question 11

An increase in the tax rate (t)

A) will rotate the budget line upward.
B) will increase the slope of the budget line.
C) will shift the budget line downward.
D) A and B.

Question 12

The actual government budget surplus ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A) cannot; it excludes non-discretionary spending changes
B) can; it includes non-discretionary spending changes
C) cannot; it includes non-discretionary spending changes
D) can; it excludes automatic stabilization expenditures

Question 13

The progressive income tax is an automatic stabilizer with respect to the Federal government's budget surplus or deficit because

A) individuals must "automatically" pay taxes even when they have a deficit.
B) during periods of output growth, a greater percentage of real income "leaks" from the expenditure stream.
C) during periods of output growth, the marginal leakage rate increases as taxes decrease.
D) None of the above.

Question 14

In the 1980s, expansionary fiscal policy is believed to have crowded out

A) domestic investment as interest rates rose.
B) exports and imports as interest rates rose.
C) exports but not domestic investment as interest rates rose.
D) domestic investment as interest rates fell.

Question 15

The structural surplus is

A) the difference between the actual surplus and the natural employment surplus and it increases whenever income rises.
B) identical to the natural employment surplus and it increases whenever tax rates are cut.
C) identical to the natural employment surplus and it decreases whenever the natural level of output increases.
D) identical to the natural employment surplus and it increases whenever the natural level of output increases.

Question 16

In the 1980s national savings declined as a percentage of GDP. Assuming that domestic private investment's percentage share has not declined, this situation requires, ceteris paribus,

A) net foreign investment (NX) to decrease.
B) net foreign investment (NX) to increase.
C) U.S. exports to decrease.
D) A and C are both necessary outcomes.

Question 17

The structural deficit is

A) the difference between the actual deficit and the natural employment deficit and it increases whenever income rises.
B) identical to the natural employment deficit and it decreases whenever tax rates are cut.
C) identical to the natural employment deficit and it increases whenever the natural level of output increases.
D) identical to the natural employment deficit and it decreases whenever the natural level of output increases.

Question 18

The actual government budget deficit ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A) cannot; it excludes non-discretionary spending changes
B) can; it includes non-discretionary spending changes
C) cannot; it includes non-discretionary spending changes
D) can; it excludes automatic stabilization expenditures

Question 19

The natural employment surplus is

A) G + T.
B) Y - tYN.
C) tYN - G.
D) YN + G + tYN.

Question 20

Figure 5-1
In the figure above, if the budget line BB0, the natural real GDP is $5300, and actual real GDP is $5000, then the cyclical budget surplus or deficit is the

A) horizontal distance between A and F.
B) vertical distance between F and D.
C) vertical distance A and F.
D) horizontal distance between B and D.

Question 21

A structural budget deficit

A) appeared during the Vietnam War era from 1966-68.
B) appeared after 1982 due to tax cuts and spending increases.
C) peaked at 5 percent of GDP in mid-1986 and had become a structural surplus by 1997.
D) all of the above.

Question 22

The cyclical deficit is

A) the amount by which the actual government budget deficit exceeds the structural deficit.
B) the amount by which structural deficit exceeds the actual budget deficit.
C) the same as the structural deficit.
D) what the budget deficit would be if the economy were operating at the natural real GDP level.

Question 23

A crucial national income accounting identity sets the government budget deficit equal to

A) S - I - NX.
B) S + I - NX.
C) S - I + NX.
D) S + I + NX.

Question 24

In the late 1980s the U.S. government ran a succession of large budget ________ which resulted mainly in ________ crowding-out.

A) deficits, domestic
B) deficits, international
C) surpluses, domestic
D) surpluses, international

Question 25

An example of "automatic stabilizers" is a rise in ________ causing the budget deficit to ________.

A) real GDP, fall
B) real GDP, rise
C) government expenditures, fall
D) government expenditures, rise
E) the average tax rate, fall

Question 26

An increase in government expenditures that ________ the budget deficit in an example of ________.

A) raises, automatic stabilization
B) raises, discretionary fiscal policy
C) lowers, automatic stabilization
D) lowers, discretionary fiscal policy

Question 27

Suppose we are modeling a "closed" economy. The only way its government can obtain more goods and services than it can claim with net tax revenues is for

A) exports to exceed imports.
B) imports to exceed exports.
C) investment to exceed saving.
D) saving to exceed investment.

Question 28

The 2001 recession was caused principally by

A) a slowing in the growth of the money supply.
B) a drop in autonomous consumption spending.
C) a decrease in government spending
D) a drop in real business investment.

Question 29

Suppose we have an economy for which G = 1100, T = 800, S = 230, and I = 230. If I falls to 150, the economy's trade deficit

A) increases from 0 to 80.
B) decreases from 300 to 220.
C) decreases from 0 to -80.
D) decreases from 70 to -10.
E) increases from 0 to 70.

Question 30

By far the largest real government budget deficits measured as a percentage of natural real GDP occurred during

A) World War I.
B) the Great Depression.
C) World War II.
D) the late 1960s.
E) the late 1980s and early 1990s.

Question 31

A recession normally causes ________ in government net tax revenues, ________ the budget deficit is an example of ________ automatic stabilization.

A) an increase, increasing, the working of
B) an increase, decreasing, a failure of
C) a decrease, decreasing, the working of
D) a decrease, increasing, a failure of
E) a decrease, increasing, the working of

Question 32

Historical data suggests that a trend toward ________ natural employment ________.

A) larger, deficits from the early 1960s to the mid-1980s.
B) larger, surpluses form the early 1960s to the mid-1980s.
C) smaller, surpluses form the mid-1980s to 1995.
D) larger, surpluses from the mid-1980s to 1995.

Question 33

A prominent postwar pattern of U.S. government budget deficits was broken in 1983-1990 as

A) recession was accompanied by a shrinking deficit.
B) recession was accompanied by a growing deficit.
C) recovery from recession was accompanied by a shrinking deficit.
D) recovery from recession was accompanied by a growing deficit.

Question 34

Suppose we have an economy for which G = 300, T = 240, S = 80, I = 45, and imports = 40. Exports must be

A) 25.
B) 40.
C) 15.
D) 65.
E) -25.

Question 35

A government budget deficit is financed by a combination of

A) saving rising relative to domestic investment and imports rising relative to exports.
B) saving rising relative to domestic investments and exports rising relative to imports.
C) domestic investment rising relative to saving and imports rising relative to exports.
D) domestic investment rising relative to saving and exports rising relative to imports.

Question 36

In the period 1980-92, United States net national saving fell due to

A) large budget deficits and an increase in private saving.
B) small budget deficits and a decrease in private saving.
C) small budget deficits and an increase in private saving.
D) large budget deficits and a decrease in private saving.

Question 37

Given the average tax rate t, a general expression for the budget deficit is

A) tG - Y.
B) Y - tG.
C) G - tY.
D) Y - (G/t).

Question 38

In 1990-1991, the government budget deficit ________ mainly due to the ________.

A) rose, recession's effect on tax collection
B) rose, expenditures of the Persian Gulf War
C) fell, recession's effect on government expenditures
D) fell, economic stimulus provided by the Persian Gulf War

Question 39

A government budget surplus

A) decreases a country's ability to finance domestic and foreign investment.
B) increases a country's ability to finance domestic and foreign investment.
C) increases a country's ability to finance domestic investment and decreases its ability to finance foreign investment.
D) decreases a country's ability to finance domestic investment and increases its ability to finance foreign investment.

Question 40

The economic policy response to the 2001 recession consisted of

A) a rapid change in fiscal policy and monetary policy.
B) a sluggish change in fiscal policy and monetary policy.
C) a rapid change in fiscal policy and a sluggish change in monetary policy.
D) a sluggish change in fiscal policy and a rapid change in monetary policy.

Question 41

Suppose we have an economy in which G = 100, t = 0.26, Y = 3800, and YN = 4000. Then t rises to 0.28 as the same time as G rises to 1150. The overall impact of this resettling of the fiscal variables is ________ because ________.

A) expansionary, the actual deficit rises
B) expansionary, the natural employment deficit falls
C) contractionary, the natural employment deficit falls
D) contractionary, the natural employment deficit rises
E) contractionary, the actual deficit rises

Question 42

Suppose we have an economy in which G = 1100, t = 0.26, Y = 3800, and YN = 4000. At Y, the actual deficit is

A) 60.
B) 200.
C) 112.
D) 286.
E) -60.

Question 43

With a vertical LM curve, an increase in the money supply can be matched by an equal increase in money demand only through ________, which causes monetary policy to be particularly ________.

A) a rise in income, strong
B) a rise in income, weak
C) a fall in the interest rate, strong
D) a fall in the interest rate, weak

Question 44

In the diagram of the budget line BB, a rise in government expenditure shifts BB ________, so that an unchanged GDP the budget deficit ________.

A) downward, rises
B) downward, falls
C) downward, remains unchanged
D) upward, rises
E) upward, falls

Question 45

An increase in the average tax rate that ________ the budget deficit in an example of ________.

A) raises, automatic stabilization
B) raises, discretionary fiscal policy
C) lowers, automatic stabilization
D) lowers, discretionary fiscal policy

Question 46

In a closed economy, a decrease in government spending while taxes remain the same will be accompanied by:

A) a decrease in private investment and an increase in privates saving
B) an increase in private investment and a decrease in private savings
C) a decrease in private investment only
D) an increase in private savings only

Question 47

In a small open economy, an increase in government spending, while taxes remain the same, will be accompanied by:

A) a decrease in private investment and an increase in privates saving
B) an increase in private investment and a decrease in private savings
C) a decrease in national savings and an increase in foreign borrowing
D) an increase in national savings and a decrease in foreign borrowing

Question 48

If an economy uses monetary policy as its stabilization tool, the real interest rate and thus ________-run economic welfare depend on that economy's ________ policy.

A) short, monetary
B) short, fiscal
C) long, monetary
D) long, fiscal

Question 49

If monetary policy is used to control GDP, there is greater sacrifice of long-run economic growth in pursuing short-run stabilization the ________ is fiscal policy and thus the ________ is the real interest rate.

A) tighter, higher
B) tighter, lower
C) easier, higher
D) easier, lower

Question 50

Actual output exceeds the natural output when

A) the actual budget surplus is above the structural surplus.
B) the actual budget surplus is below the structural surplus.
C) the structural surplus is positive.
D) the structural surplus is negative.

Question 51

The clearest indicator of a switch to a less expansionary fiscal policy is a

A) rise in the actual surplus.
B) fall in the actual surplus.
C) rise in the natural employment surplus.
D) fall in the natural employment surplus.

Question 52

Actual output exceeds the natural output when

A) the actual budget deficit is above the structural deficit.
B) the actual budget deficit is below the structural deficit.
C) the structural deficit is positive.
D) the structural deficit is negative.

Question 53

An increase in tax revenues ________ government saving and ________ national saving.

A) raises, raises
B) raises, lowers
C) lowers, raises
D) lowers, lowers

Question 54

The clearest indicator of a switch to a less expansionary fiscal policy is a

A) rise in the actual deficit.
B) fall in the actual deficit.
C) rise in the natural employment deficit.
D) fall in the natural employment deficit.

Question 55

A large government budget deficit ________ government saving and ________ national saving.

A) raises, raises
B) raises, lowers
C) lowers, raises
D) lowers, lowers

Question 56

Suppose we have an economy in which G = 1100, t = 0.26, Y = 3800, and YN = 4000. The natural employment deficit is

A) 60.
B) 200.
C) 840.
D) 286.
E) -112.

Question 57

In a closed economy, an increase in government spending, while taxes remain the same, will be accompanied by:

A) a decrease in private investment and an increase in privates saving
B) an increase in private investment and a decrease in private savings
C) a decrease in private investment only
D) an increase in private savings only

Question 58

In a small open economy, when exports exceed imports, all of the following are true except:

A) net capital outflows are positive
B) net exports are positive
C) domestic investment exceeds domestic saving
D) domestic output exceeds spending

Question 59

In a small open economy, the real interest rate will always be:

A) above the world real interest rate
B) below the world real interest rate
C) equal to the world real interest rate
D) independent of the world real interest rate

Question 60

Suppose we have an economy in which G = 1100, t = 0.26, Y = 3800, and YN = 4000. At Y the cyclical deficit is

A) 60.
B) 112.
C) -172.
D) -52.
E) 52.

Question 61

If S = 200, T = 700, G = 950, and NX = -200, this makes net domestic investment

A) 150.
B) -150.
C) 50.
D) -50.
E) 650.

Question 62

In the late 1980s, ________ domestic private investment led to ________ in net foreign borrowing.

A) higher, an increase
B) higher, a decrease
C) lower, an increase
D) lower, a decrease

Question 63

If S = 250, T = 170, NX = -20, this makes government saving

A) -50.
B) -70.
C) 70.
D) 50.
E) -100.

Question 64

In the 1980s, the United States on net ________ foreign nations so that its private firms could absorb through domestic investment ________ goods than what was being left for them by national saving.

A) borrowed from, more
B) borrowed from, fewer
C) lent to, more
D) lent to, fewer

Question 65

When a nation's national saving falls short of its domestic investment, it must be

A) experiencing a government budget surplus.
B) experiencing a government deficit.
C) a net lender to foreign nations.
D) a net borrower from foreign nations.

Question 66

If a nation's budget deficit rises, domestic private investment can remain unchanged through some combination of ________ private saving and ________ importing relative to exporting.

A) increased, less
B) increased, more
C) decreased, less
D) decreased, more

Question 67

Current account includes all of the following except:

A) net exports
B) net income from abroad
C) net unilateral transfers
D) net regulations

Question 68

Compared to 1960-79, U.S. net national saving form 1980-92 as a proportion of national income

A) rose tremendously.
B) rose slightly.
C) fell slightly.
D) fell precipitously.

Question 69

If a country's private saving is 100 and government saving is -100, domestic private investment

A) must be 200.
B) must be zero.
C) is equal to the net amount the economy borrows from other countries.
D) is equal to the net amount the economy lends to other countries.

Question 70

If S = 300, T = 800, G = 1100, and I = 150, this makes net foreign investment

A) 150.
B) -150.
C) 450.
D) 750.
E) -450.

Question 71

From 2004 to 2006, the European Union budget was ________, private saving was ________ domestic investment, and foreign lending ________.

A) balanced, roughly equal to, negligible
B) balanced, less than, substantial.
C) surplus, greater than, negligible
D) in deficit, greater than, negligible

Question 72

In the current debate over fiscal policy, advocates of returning to significant budget surpluses

A) contended that the economic miracle of the late 1990s caused the budget surpluses
B) think that tax cuts will benefit the wealthy
C) believe that tax cuts will continue the dependence of the United States on borrowing from foreigners.
D) All of the above.

Question 73

From 1980 to 1992 net national saving in the United States averaged approximately ________ percent of national income.

A) 32
B) 18
C) 12
D) 4.7
E) 2.2

Question 74

From 2004 to 2006, the U.S. budget was ________, private saving was ________ domestic investment, and foreign borrowing was ________.

A) in deficit, less than, needed to finance deficit
B) balanced, roughly equal to, not needed to finance deficit
C) balanced, less than, substantial.
D) surplus, greater than, negligible

Question 75

Switching to a faster economic growth path comes at the cost of lower

A) present investment.
B) present consumption.
C) future investment.
D) present saving.
E) future saving.

Question 76

From 2004 to 2006, the Japanese budget was ________, private saving was ________ domestic investment, and foreign lending ________.

A) in deficit, greater than, moderate
B) balanced, roughly equal to, negligible
C) balanced, less than, moderate.
D) surplus, greater than, negligible

Question 77

In 1980, the U.S. budget was ________, private saving was ________ domestic investment, and foreign borrowing was ________.

A) in deficit, higher than, not needed to finance deficit
B) balanced, roughly equal to, not needed to finance deficit
C) balanced, less than, substantial.
D) surplus, greater, negligible

Question 78

From 1988 to 1990, the U.S. budget was ________, private saving was ________ domestic investment, and foreign borrowing was ________.

A) in deficit, higher than, still needed to finance deficit
B) balanced, roughly equal to, not needed to finance deficit
C) balanced, less than, substantial.
D) surplus, less than, negligible

Question 79

The "twin deficits" refer to government expenditures being ________ than net tax revenues at the same time as exports ________ imports.

A) less, are below
B) less, exceed
C) greater, are below
D) greater, exceed