Question 1

Deficits are correlated inversely with

Accepted Answer

As GDP grows, tax revenues increase due to higher incomes and economic activity, while transfer payments decrease as fewer people need government assistance, reducing the deficit.

Question 2

For the fiscal year starting in October 2003, the U.S. government reported a budget deficit of

Accepted Answer

The U.S. government reported a budget deficit of $383 billion or about 3.8 percent of GDP for the fiscal year starting in October 2003, making option B correct.

Question 3

Any deficit that a government might run must be financed somehow. Which of the following is a vehicle by which a government might finance spending beyond its means?

Accepted Answer

Floating new bonds is a common method governments use to finance spending beyond their means. By issuing new bonds, they borrow money from investors that they agree to pay back with interest at a later date.

Question 4

Which of the following policy measures is not discretionary?

Accepted Answer

Interest payments for servicing the national debt are not discretionary because they are required payments on the government's existing debt, not policy choices made to influence the economy's direction.

Question 5

Changes in GDP translate into changes in disposable income that are

Accepted Answer

The answer of Changes in GDP translate into changes in...

Question 6

Which of the following word equations accurately records the relationship between actual, structural, and cyclical deficits?

Accepted Answer

The structural deficit is calculated by subtracting the cyclical deficit from the actual deficit.

Question 7

It is not completely accurate to assume that government spending is exogenous because

Accepted Answer

Government spending is not entirely exogenous because it includes components that are influenced by the current state of the economy (automatic policy rules), decisions made by policymakers in response to economic conditions, and political motivations tied to election cycles.

Question 8

Which of the following are transfer programs that work to automatically stabilize the level of economic activity around its "potential"?

Accepted Answer

The answer of Which of the following are transfer programs...

Question 9

One variant of rational expectations theory that supports the long-run neutrality of fiscal policy asserts that

Accepted Answer

The variant of rational expectations theory supporting the long-run neutrality of fiscal policy posits that individuals anticipate the future implications of current fiscal actions, such as tax cuts or increased government spending. They adjust their behavior accordingly, by saving more to prepare for future tax increases or recognizing that government borrowing must eventually be repaid, often through higher taxes. This anticipation and behavioral adjustment neutralize the intended effects of fiscal policy, leading to its long-run neutrality. All the options provided (A, B, C) describe mechanisms through which this anticipation and adjustment process might occur, fitting together to support the theory of fiscal neutrality.

Question 10

As a percentage of GDP, the total debt of the federal government of the United States

Accepted Answer

The answer of As a percentage of GDP, the total...

Question 11

Suppose that a simple tax system were to assess no tax up through $10,000, a 10 percent rate for income between $10,000 and $20,000, and a 20 percent rate on every dollar earned above $20,000. If inflation were to run at 10 percent for a year, then indexing would cause the 10 percent bracket to

Accepted Answer

Indexing for inflation would adjust the tax brackets by the inflation rate, so the 10 percent bracket would start at $11,000 (10% increase from $10,000) and end at $22,000 (10% increase from $20,000).

Question 12

Government in any economy can influence aggregate demand by

Accepted Answer

All the options (A, B, C, D) are ways through which the government can influence aggregate demand in an economy. This includes direct purchases of goods and services, income transfers that alter consumption patterns, and taxation adjustments.

Question 13

Suppose inflation were proceeding at a rate of 10 percent per year. If the real deficit were in balance, then the nominal budget would be

Accepted Answer

When inflation is at 10 percent per year and the real deficit is balanced, the nominal budget would be in deficit by a percentage that depends on the size of the outstanding debt. This is because the government must pay more on its debt due to inflation, affecting the nominal budget balance.

Question 14

The structural deficit

Accepted Answer

The answer of The structural deficit
...

Question 15

One interpretation of the correlation between changes in the real interest rate and the federal deficit is that the

Accepted Answer

The negative correlation suggests that both interest rates and aggregate demand decline during a recession, leading to higher deficits.

Question 16

Over short-run periods during the past three to four decades, real interest rates appear to have fallen in the face of higher deficits rather than risen. How might this seeming contradiction best be explained?

Accepted Answer

Deficits often occur when the economy is in a slump, which is a period when interest rates are typically low to stimulate economic activity. Additionally, the observation that real interest rates have fallen despite higher deficits suggests that deficits themselves do not directly cause high real interest rates. This explanation combines elements of both A and B, making D the correct choice.

Question 17

If changes in GDP are not totally reflected in changes in disposable income, then they must, to a significant degree, be absorbed by changes in

Accepted Answer

The answer of If changes in GDP are not totally...

Question 18

Which of the following statements is not an accurate description of the 1970s?

Accepted Answer

During the 1970s, it was increasingly difficult for congressional representatives to say no to constituents' spending demands, contrary to the assertion in option C. This period was marked by growing government spending and fiscal challenges, making it a time when political pressures often led to increased spending rather than restraint.

Question 19

Suppose that an economy with a progressive income tax that began to assign tax liability at $10,000 were to go into a recession. If only those people at the lower end of the income distribution were laid off and filed for untaxed unemployment compensation, then the average tax rate computed across the remaining taxpayers would

Accepted Answer

In a progressive tax system, individuals with lower incomes pay a lower tax rate. If those at the lower end of the income distribution are laid off and receive untaxed unemployment compensation, they are no longer part of the tax-paying population. This removal of lower-income (and thus lower-rate) taxpayers from the calculation would increase the average tax rate among the remaining taxpayers, as those left are relatively higher earners who are subject to higher tax rates.

Question 20

One way of financing a budget deficit is for that nation's central bank to monetize the debt. In the United States,

Accepted Answer

The Federal Reserve Bank has monetized only a small portion of the national debt, primarily through open market operations where it buys government securities, but this does not constitute a large portion of the national debt.

Quiz 13: Spending, Taxes, and the Budget Deficit