Question 1

If an economy operates below potential income, the actual deficit is:

Accepted Answer

When an economy operates below its potential income, the actual deficit is larger than the structural deficit. This is because lower economic activity leads to lower tax revenues and potentially higher government spending (for example, on unemployment benefits), both of which can increase the actual deficit beyond the structural deficit, which is the deficit adjusted for the business cycle.

Question 2

When the government runs a deficit, it will:

Accepted Answer

When the government runs a deficit, it means it is spending more money than it is receiving from taxes and other revenues. To finance this deficit, the government will sell bonds to investors. The sale of bonds is a way for the government to borrow money from the public or other countries.

Question 3

A government can finance its budget deficit by doing all of the following except:

Accepted Answer

Buying bonds is a method used by investors, including individuals and institutions, to lend money to the government. When a government is financing its budget deficit, it does so by borrowing money, which can involve selling bonds to investors (not buying them), borrowing from its central bank, or printing money. Buying bonds would actually be a way for the government to spend its resources, not to finance a deficit.

Question 4

The budget deficit or surplus is:

Accepted Answer

The budget deficit or surplus can be complex to measure due to various accounting methods, interpretations, and the scope of what is included in the calculation, making it legitimately definable in several ways.

Question 5

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the cyclical deficit:

Accepted Answer

The cyclical deficit is the difference between potential GDP and actual GDP multiplied by the marginal tax rate. In this case, the cyclical deficit is ($60 billion - $40 billion) x 0.20 = $4 billion.

Question 6

A cyclical deficit is the portion of the deficit that exists when:

Accepted Answer

A cyclical deficit occurs when the economy is operating below its potential income, leading to lower tax revenues and potentially higher government spending on unemployment benefits and other automatic stabilizers, thus increasing the deficit.

Question 7

The budget deficit or surplus is:

Accepted Answer

The budget deficit or surplus is hard to calculate because economists often disagree on the methods and criteria for computing it, leading to variations in calculations.

Question 8

If a cyclical surplus exists, the economy must be:

Accepted Answer

A cyclical surplus occurs when actual GDP is higher than potential GDP, indicating the economy is operating above its potential income. This situation typically arises during periods of economic expansion.

Question 9

During World War II, the economic boom that raised U.S. equilibrium income above potential income:

Accepted Answer

The economic boom during World War II raised U.S. equilibrium income above potential income, which would have increased tax revenues and decreased government spending on unemployment benefits and other social services, thus reducing or eliminating any cyclical deficit. Cyclical deficits occur when an economy is operating below its potential output, leading to lower tax revenues and higher government spending.

Question 10

If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

Accepted Answer

The cyclical deficit is the difference between potential income and actual income. In this case, the cyclical deficit is $350 billion - $300 billion = $50 billion. The total surplus is $20 billion, so the cyclical deficit cannot be zero. The cyclical deficit cannot be $1 billion or $10 billion because these values are less than the total surplus. The cyclical deficit cannot be $20 billion because this is the value of the total surplus.

Question 11

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

Accepted Answer

The structural deficit is the part of the budget deficit that exists even when the economy is at its potential income level. Since the actual income is below potential, some of the total deficit could be attributed to cyclical factors (the cyclical deficit), which would decrease as income rises to its potential level. Therefore, the structural deficit could be less than the total deficit but cannot equal the total deficit of $20 billion when the economy is not at its potential.

Question 12

If taxes and government expenditures were constant and did not vary with income, then:

Accepted Answer

Cyclical deficits occur because of fluctuations in the economy's output or income, leading to changes in tax revenues and government spending. If taxes and government expenditures were constant and did not vary with income, then the budget outcome would not be affected by the economic cycle, eliminating cyclical deficits.

Question 13

When the economy is operating close to potential, the budget deficit experienced is:

Accepted Answer

When the economy is operating close to its potential, the budget deficit experienced is primarily structural. This is because structural deficits are the result of deliberate policy choices regarding spending and taxation levels, rather than fluctuations in economic activity. Cyclical deficits, on the other hand, occur when the economy is underperforming or in a downturn, which is not the case when it is operating close to potential.

Question 14

A policy of fiscal austerity could have difficulty lowering the debt-to-GDP ratio because it might:

Accepted Answer

Fiscal austerity typically involves reducing government spending and possibly increasing taxes, which can lead to lower GDP growth due to reduced demand in the economy. Additionally, lower GDP growth can result in lower government revenue from taxes, making it difficult to lower the debt-to-GDP ratio.

Question 15

The structural deficit:

Accepted Answer

The structural deficit does not change with fluctuations in actual income; it is influenced by changes in potential income, reflecting the underlying fiscal position of the government adjusted for the economic cycle.

Question 16

The cyclical deficit:

Accepted Answer

The cyclical deficit increases when the economy is performing below its potential output because tax revenues decrease and government spending on unemployment benefits and other automatic stabilizers increases, leading to a higher deficit.

Question 17

Economists who focus on the need for fiscal austerity tend to focus on

Accepted Answer

Economists who advocate for fiscal austerity typically emphasize the importance of long-term financial sustainability and health, arguing that reducing government deficits and debt levels is crucial for the economy's future stability and growth.

Question 18

Compared to the predictions of the standard AS/AD model, the structural stagnation model implies that the:

Accepted Answer

The structural stagnation model implies that the structural deficit is higher because it suggests an economy experiencing long-term stagnation due to structural issues, leading to lower growth and higher deficits compared to the standard Aggregate Supply/Aggregate Demand (AS/AD) model predictions.

Question 19

If income falls below its potential and the income tax rate is reduced, this will:

Accepted Answer

Reducing the income tax rate decreases government revenue, which increases both the cyclical deficit (due to lower tax revenue during economic downturns) and the structural deficit (as the tax rate change is a permanent policy shift).

Question 20

Deficits and surpluses are best viewed as:

Accepted Answer

Deficits and surpluses are primarily used to summarize a nation's fiscal policy, reflecting the government's spending and revenue collection decisions.

Quiz 31: Deficits and Debt: the Austerity Debate

If an economy operates below potential income, the actual deficit is:

When the government runs a deficit, it will:

A government can finance its budget deficit by doing all of the following except:

The budget deficit or surplus is:

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the cyclical deficit:

A cyclical deficit is the portion of the deficit that exists when:

The budget deficit or surplus is:

If a cyclical surplus exists, the economy must be:

During World War II, the economic boom that raised U.S. equilibrium income above potential income:

If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

If taxes and government expenditures were constant and did not vary with income, then:

When the economy is operating close to potential, the budget deficit experienced is:

A policy of fiscal austerity could have difficulty lowering the debt-to-GDP ratio because it might:

The structural deficit:

The cyclical deficit:

Economists who focus on the need for fiscal austerity tend to focus on

Compared to the predictions of the standard AS/AD model, the structural stagnation model implies that the:

If income falls below its potential and the income tax rate is reduced, this will:

Deficits and surpluses are best viewed as: