Question 1

One way to shift the tax burden from the current generation to future generations is to finance a war:

Accepted Answer

Running a budget deficit means that the government will spend more money than it takes in through taxes, meaning that it will need to borrow money by selling bonds. These bonds will be bought by investors, including future generations, who will then have to pay for the interest on the debt through their own taxes. Therefore, financing a war through a budget deficit can shift the tax burden onto future generations. Raising taxes or running a budget surplus would not shift the burden to future generations, while printing money would lead to inflation and hurt the current generation as well.

Question 2

Financing a budget deficit by _____ leads to inflation, and inflation _____ the real value of government debt.

Accepted Answer

The answer of Financing a budget deficit by _____ leads...

Question 3

In response to a tax cut, the consumption of a consumer who is borrowing constrained _____, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence _____.

Accepted Answer

A borrowing-constrained consumer is likely to increase consumption in response to a tax cut due to immediate additional disposable income. A forward-looking, unconstrained consumer, under the Ricardian equivalence, would perceive the tax cut as a future tax liability increase and thus, would not change their consumption, as they understand that current government savings will have to be paid back in the future.

Question 4

Suppose a household considers only current income in making consumption decisions. This is an example of:

Accepted Answer

Myopia refers to a situation where a household or individual only considers current income in making consumption decisions, without considering future income or long-term financial planning. Therefore, this choice best reflects myopia. The permanent-income hypothesis and the life-cycle model both consider future income and long-term financial planning. Ricardian equivalence refers to the idea that a change in government spending will be offset by a change in private saving, so it is not relevant to this question.

Question 5

Using fiscal policy, including automatic stabilizers, to stabilize output over a business cycle is not consistent with:

Accepted Answer

A strict balanced-budget rule would limit the government's ability to use fiscal policy to stabilize output during a business cycle because it would require the government to maintain a balanced budget regardless of economic conditions. This would limit the government's ability to use deficit spending during recessionary periods to increase aggregate demand and stimulate economic growth. The other options, rational expectations, inflation targeting, and the natural-rate hypothesis, are not necessarily inconsistent with using fiscal policy to stabilize output over the business cycle.

Question 6

All of the following are arguments against Ricardian equivalence except:

Accepted Answer

Ricardian equivalence suggests that consumers are rational and forward-looking, meaning they anticipate future taxes and adjust their spending accordingly. This choice is consistent with Ricardian equivalence, while the others are arguments against it.

Question 7

Assume that nobody cares about the economic well-being of future generations. Then the Ricardian equivalence view of the effect of debt-financed tax cuts is:

Accepted Answer

The answer of Assume that nobody cares about the economic...

Question 8

A debt-financed tax cut will _____ saving in the traditional view and _____ saving in the view of Ricardian equivalence.

Accepted Answer

In the traditional view, a debt-financed tax cut is believed to decrease saving because individuals have more disposable income to spend. According to Ricardian equivalence, individuals anticipate future taxes to pay off the debt and thus their saving behavior does not change; they save the tax cut to prepare for future tax increases.

Question 9

To force politicians to judge whether government spending is worth the costs, some economists have argued for:

Accepted Answer

A balanced-budget rule for fiscal policy would require government spending to be equal to tax revenue, thus forcing politicians to carefully consider the costs and benefits of spending programs. This would prevent excessive government spending without a clear purpose and ultimately lead to more efficient allocation of resources. The other options do not directly address the issue of government spending and cost-benefit analysis.

Question 10

In Canada, most provinces repealed their balanced budget legislation because:

Accepted Answer

Balanced budget legislation was repealed because it was recognized that there are times when it is necessary for governments to run budget surpluses or deficits to respond to economic conditions and fiscal needs.

Question 11

High levels of government debt that raise investors' fear of a government default on debt will result in capital _____ and a(n) _____ of the country's exchange rate.

Accepted Answer

High levels of government debt are associated with increased risk of default, which may cause investors to withdraw their capital from the country. This leads to capital outflows, which in turn reduces demand for the country's currency and causes it to depreciate relative to other currencies.

Question 12

Hyperinflations typically occur when governments:

Accepted Answer

Hyperinflations occur when governments resort to financing their spending through the inflation tax, which involves printing money to pay for expenditures. This leads to an increase in money supply, which reduces the value of the currency and causes inflation to spiral out of control. Choices A, C, and D are not directly linked to hyperinflation.

Question 13

One reason for not requiring a balanced federal budget at all times is that with a balanced-budget rule:

Accepted Answer

In a recession, the automatic stabilizing powers of our system of taxes and transfers could not work with a balanced-budget rule.

Question 14

The possibility of capital flight is likely to be greater at higher levels of government debt because there is a greater:

Accepted Answer

At higher levels of government debt, there is a greater temptation for the government to default on the debt, leading to uncertainty for investors and a higher likelihood of capital flight.

Question 15

To minimize the disincentives of very high taxes, a policy of tax smoothing requires a budget _____ in years of unusually low government revenue and a budget _____ in years of unusually high government expenditures.

Accepted Answer

The answer of To minimize the disincentives of very high...

Question 16

Monetary policy is linked to fiscal policy when government spending is financed by:

Accepted Answer

The answer of Monetary policy is linked to fiscal policy...

Question 17

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would _____ the extra take-home pay, while those facing binding borrowing constraints would _____ the extra-take home pay.

Accepted Answer

Ricardian equivalence suggests that households, anticipating they will have to pay more taxes in the future to offset the government's reduced tax revenue, will save the extra take-home pay rather than spend it. On the other hand, households facing binding borrowing constraints are more likely to spend the extra take-home pay because they have immediate liquidity needs or cannot borrow easily to finance current consumption.

Question 18

When U.S. President George H. W. Bush lowered tax withholding in the United States in 1992 without lowering the amount of taxes owed, surveys showed that:

Accepted Answer

Surveys indicated that while a majority of respondents intended to save the higher take-home pay, a significant minority planned to spend it.

Question 19

Tax smoothing is a desirable policy because it:

Accepted Answer

Tax smoothing refers to the practice of keeping taxes relatively constant over time, rather than fluctuating heavily in response to changes in the economy or political pressures. This helps to reduce the distortion of incentives caused by taxes, as taxpayers are better able to plan and make decisions without sudden changes in tax rates. Additionally, tax smoothing can help to stabilize government revenue over time and reduce the likelihood of large budget deficits or surpluses. While tax smoothing does not necessarily lead to a balanced budget, it can help to promote fiscal sustainability over the long term.

Question 20

A debt-financed tax cut will _____ current consumption in the traditional view and _____ current consumption in the view of Ricardian equivalence.

Accepted Answer

In the traditional view, a debt-financed tax cut is believed to increase current consumption because people have more disposable income. However, under Ricardian equivalence, it is argued that individuals anticipate the future tax increases necessary to pay off the debt, so they save the tax cut instead of spending it, leaving current consumption unchanged.

Quiz 17: Government Debt and Budget Deficits

One way to shift the tax burden from the current generation to future generations is to finance a war:

Financing a budget deficit by _ leads to inflation, and inflation _ the real value of government debt.

In response to a tax cut, the consumption of a consumer who is borrowing constrained _, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence _.