Question 1

A country with total debt of $500 million has a nominal interest rate of 10 percent and a real interest rate of 6 percent. Is the budget deficit of the country underestimated or overestimated, and by how much?

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Question 2

In 2018, Canada's budget deficit was approximately $18 billion (about one percent of GDP). Some economists say that this deficit is understated. Why do they say this?

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Question 3

What is Ricardian equivalence? Give at least three reasons Ricardian equivalence might not correctly describe an economy.

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Question 4

Spending more than earning will always cause a deficit in the budget and is always considered a bad thing. Is there a possibility that a budget deficit in any economy can have some advantages, too? Give two examples of these advantages, if any.

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Question 5

The government of Moneyland decides that it is not going to change its spending but will decrease the taxes. According to the theory of Ricardian equivalence, what will be the effects of the government action on national saving?

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Question 6

Many people are concerned about the current budget deficit of the Canadian government. Suggest at least three possible negative economic effects of a budget deficit and three possible economic benefits of a budget deficit.

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Question 7

War is the generator of debt burden for countries. How does war generate debt for a country?

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Question 8

The Department of Finance Canada reports the budget deficit or surplus of the federal government. Give at least one reason why the measured budget deficit might overstate the "true" deficit and at least one reason the measured figure might understate the "true" deficit.

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Question 9

"The baby-boom generation (people born between 1946 and 1965) is responsible for pushing the Canadian economy into more debt." Is this statement true or false? Give reasons supporting your answer.

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Question 10

Graphically illustrate the traditional view of the short-run impacts of a debt-financed tax cut on:
a.interest rates and output in a closed economy in the short run, using the IS-LM model.
b.exchange rates and output in a small open economy with a flexible exchange rate in the short run, using the Mundell-Fleming model.

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Question 11

Using the model of aggregate demand-aggregate supply to illustrate the traditional view, graphically compare the short-run and long-run impact of debt-financed tax cuts on:
a. output.
b. prices.

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Question 12

Graphically illustrate the traditional view of the long-run impacts of a debt-financed tax cut on:
a.saving, investment, and real interest rate using the classical model (Chapter 3).
b.steady state capital per worker and output per worker using the Solow growth model.

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Question 13

Compare the traditional view versus the view of Ricardian equivalence of the effects of a debt-financed tax cut on:
a.national saving.
b.current consumption.
c.the real interest rate.

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Question 14

Explain how tax cuts can affect both aggregate demand and aggregate supply.

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Question 15

Printing money increases inflation. The higher the inflation, the lower the real value of debt. So why is this method not used to pay debts?

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Quiz 17: Government Debt and Budget Deficits