Question 1

A crowding-out effect occurs when government borrowing raises interest rates and discourages investment spending.

Accepted Answer

A crowding-out effect occurs when government borrowing increases the demand for loanable funds, which in turn increases interest rates and reduces private sector investment spending. This is because higher interest rates make borrowing more expensive for businesses and individuals, which can reduce their willingness to invest in new projects or make large purchases.

Question 2

One argument against using taxation to pay off the public debt is that it will redistribute wealth from people who do not hold bonds to bondholders.

Accepted Answer

This argument is true since a tax increase to pay off public debt would primarily affect taxpayers who do not hold bonds, whereas bondholders would benefit from receiving the interest payments on their bonds. This would result in a redistribution of wealth from non-bondholders to bondholders.

Question 3

Countries such as China often purchase U.S. debt to keep their currencies from falling against the U.S. dollar.

Accepted Answer

Countries like China purchase U.S. debt to keep their currencies from appreciating too much against the U.S. dollar, which helps maintain their export competitiveness.

Question 4

Countries such as China often purchase U.S. debt to help manage their exchange rates against the U.S. dollar.

Accepted Answer

This is true. China and other countries may purchase U.S. debt as a way to keep their own currencies at a stable exchange rate with the U.S. dollar.

Question 5

Externally held debt is owed to noncitizens.

Accepted Answer

Externally held debt refers to debt owed to foreign individuals, entities, or governments, meaning noncitizens. Therefore, the statement is true.

Question 6

Interest paid on externally held debt does not pose a burden on our economy.

Accepted Answer

Interest paid on externally held debt represents an outflow of money from the country to foreign lenders. This means that a portion of our resources is being used to service this debt, which can restrict the amount of funds available for other domestic investments and priorities.

Question 7

If the federal deficit was $3 trillion, economic growth was 2%, and the unemployment rate was 10%, a functional finance economist would suggest increasing taxes in order to balance the budget.

Accepted Answer

Functional finance economists prioritize economic stability and full employment over balancing the budget, so they would likely not suggest increasing taxes during high unemployment.

Question 8

The burden of a nation's debt falls if interest rates fall.

Accepted Answer

If interest rates fall, the cost of borrowing decreases for the government, leading to lower interest payments on its debt. This can result in less of a burden on the nation's finances.

Question 9

The burden of a nation's debt rises if interest rates fall.

Accepted Answer

The burden of a nation's debt typically decreases if interest rates fall. With lower interest rates, the government can refinance its debt at a lower cost, which reduces the amount of interest it must pay on its outstanding debt. This means that a smaller portion of the government's budget must go towards servicing its debt, leaving more room for other spending priorities. However, if interest rates rise, the burden of the nation's debt will increase as the government must pay more interest on its outstanding debt.

Question 10

Economists in favor of the functional finance approach to balancing the federal budget believe that the first priority of lawmakers is to keep the economy at full employment with stable prices, and not to balance the federal budget.

Accepted Answer

Functional finance prioritizes economic stability and full employment over balancing the budget, focusing on fiscal policy to achieve these goals.

Question 11

If the government borrows from the public, the quantity of publicly held bonds decreases.

Accepted Answer

If the government borrows from the public, it issues new bonds that increase the quantity of publicly held bonds. As the government pays back the borrowed amount over time, the quantity of publicly held bonds will decrease.

Question 12

The U.S. public debt is about 90% of its GDP.

Accepted Answer

As of my last update in 2023, the U.S. public debt is over 120% of its GDP, indicating a higher ratio than the 90% mentioned.

Question 13

The crowding-out effect of fiscal policy arises from deficit spending.

Accepted Answer

The crowding-out effect occurs when government deficit spending leads to higher interest rates, which can reduce private investment.

Question 14

Asset sales represent a large fraction of government finance in the United States.

Accepted Answer

Asset sales do not represent a large fraction of government finance in the United States.

Question 15

Of the share of the U.S. national debt that is held by the public, foreigners hold nearly the same amount as do Americans.

Accepted Answer

According to the most recent data from the Treasury Department, about 40% of the U.S. national debt held by the public is owned by foreign entities, and approximately 30% is owned by American individuals and institutions. The remaining 30% is owned by the Federal Reserve and government trust funds.

Question 16

One argument against using taxation to pay off the public debt is that it will redistribute wealth from richer bondholders to poorer people who do not own bonds.

Accepted Answer

This statement is incorrect. Using taxation to pay off the public debt does not necessarily redistribute wealth from richer bondholders to poorer people who do not own bonds. In fact, it can have a minimal impact on wealth redistribution, as the distribution of bond ownership is not solely determined by income or wealth. Furthermore, reducing the national debt can have positive effects on economic growth and stability, which can benefit all individuals regardless of their bond ownership status.

Question 17

The sale of Treasury bills by the Federal Reserve monetizes the federal debt.

Accepted Answer

The sale of Treasury bills by the Federal Reserve is a monetary policy tool used to control the money supply and interest rates, not to monetize the federal debt. Monetizing the debt would involve the Federal Reserve buying government securities directly from the Treasury, not selling them.

Question 18

According to the functional finance approach, providing jobs and price stability is more important than balancing the budget.

Accepted Answer

According to the functional finance approach, the government's main goal should be to achieve full employment and price stability, rather than focusing solely on balancing the budget. This means that the government should be willing to run deficits or surplus as needed to achieve these goals.

Question 19

Externally held debt is public debt held by foreigners.

Accepted Answer

Externally held debt refers to public debt held by foreign entities, such as individuals, corporations, or foreign governments.

Question 20

Over the past few decades, external debt has become a less important source of funds for the U.S. federal government.

Accepted Answer

Over the past few decades, external debt, or the amount of U.S. government debt held by foreign entities, has actually become a more important source of funds for the U.S. federal government, reflecting globalization and the interconnectedness of financial markets.

Quiz 10: Fiscal Policy and Debt