Question 1

Budget deficit is the amount by which the government's expenditures exceed its receipts during a specified period of time, usually a year.

Accepted Answer

A budget deficit occurs when the government spends more than it takes in through taxes and other revenues during a certain period of time, usually a year. This results in a negative balance or shortfall in the government's budget.

Question 2

Composition of aggregate demand is a major determinant of the economy's long-run economic growth rate.

Accepted Answer

The composition of aggregate demand, including the components of consumption, investment, government spending, and net exports, can affect the allocation of resources in the economy and ultimately impact the long-run economic growth rate. For example, if there is a shift towards more investment spending, it can lead to greater capital accumulation and technological advancement, which can increase productivity and potential output in the long run.

Question 3

Budget deficits are even more inflationary if they are monetized.

Accepted Answer

Monetizing a budget deficit means that the government prints new money to pay for its expenses. This increases the money supply in the economy, which can lead to inflation by causing an increase in demand for goods and services without a corresponding increase in supply. Therefore, monetizing a budget deficit is more inflationary than financing it through other means such as borrowing or increasing taxes.

Question 4

The federal budget deficit in 2009 was more than eight times larger than the deficit in 2007.

Accepted Answer

According to data from the Congressional Budget Office, the federal budget deficit was $161 billion in 2007 and $1.4 trillion in 2009, meaning it was over eight times larger.

Question 5

Smaller budget deficits and looser monetary policy lead to a larger investment share and faster growth.

Accepted Answer

Smaller budget deficits mean less government borrowing, which leaves more funds available for private investment. Looser monetary policy, such as lower interest rates, also encourages investment by making it cheaper for businesses to borrow money. Increased investment can lead to greater productivity and economic growth.

Question 6

A large national debt can lead to a nation to bequeath less capital to future generations.

Accepted Answer

A large national debt means that the government has to spend a portion of its revenue on debt repayment rather than investing in infrastructure or other capital projects. This can limit the amount of capital that can be passed down to future generations. Additionally, a high national debt can lead to higher interest rates, which can decrease the availability of credit for businesses and individuals, further limiting economic growth and capital accumulation.

Question 7

Budget surpluses can stimulate capital formation and spur economic growth.

Accepted Answer

Budget surpluses mean that the government is collecting more revenue than it is spending, which can result in more money being available for investment in the private sector. This can lead to an increase in capital formation and ultimately economic growth.

Question 8

Monetary policy is not the only type of policy that affects interest rates.

Accepted Answer

Fiscal policy, trade policy, and other economic policies can also impact interest rates.

Question 9

Lower deficits should lead to higher levels of private investment spending.

Accepted Answer

Lower deficits usually result in lower interest rates and a more stable economic environment, which can lead to increased confidence and willingness to invest among businesses and consumers.

Question 10

The official fiscal year budget deficits disappeared from 1998 to 2001.

Accepted Answer

The US federal government had a surplus from 1998 to 2001, meaning that there were no official fiscal year budget deficits during that period.

Question 11

Budget surplus is the amount by which the government's receipts exceed expenditures during a specified period of time, usually a year.

Accepted Answer

This statement defines the concept of a budget surplus correctly.

Question 12

As GDP falls, automatic stabilizers run the federal budget in a deficit direction.

Accepted Answer

Automatic stabilizers such as unemployment insurance and welfare payments increase during an economic downturn, leading to an increase in government spending and a decrease in tax revenues. This results in a budget deficit.

Question 13

Increases in government spending or tax cuts normally push interest rates up.

Accepted Answer

When the government increases spending or implements tax cuts, there is an increase in overall demand for goods and services. This leads to an increase in inflation expectations and the Federal Reserve might respond by raising interest rate to curb inflation. Consequently, interest rates rise.

Question 14

Restrictive fiscal policies pull interest rates down.

Accepted Answer

The answer of Restrictive fiscal policies pull interest rates down....

Question 15

There is a fundamental difference between nations that borrow in their own currency (such as the United States) and nations that borrow in some other currency (often the U.S. dollar).

Accepted Answer

When a country borrows in their own currency, they have more control over their debt because they can simply print more money to pay it off if needed. However, when a country borrows in a foreign currency, they are subject to fluctuations in exchange rates and may struggle to repay the debt if their own currency depreciates.

Question 16

Until about 1983, almost all of U.S. national debt stemmed from financing wars or from the loss of tax revenues that accompany recessions.

Accepted Answer

This statement is true. Until about 1983, the majority of U.S. national debt was due to financing wars or economic recessions.

Question 17

The structural deficit can be used to estimate the thrust of current fiscal policy.

Accepted Answer

The structural deficit is a measure of the budget deficit that would exist even if the economy was operating at full capacity. It reflects the underlying long-term imbalance between government spending and revenue. By examining the structural deficit, analysts can assess the sustainability of current fiscal policy and whether it will lead to a larger or smaller deficit in the future. Therefore, it can be used to estimate the thrust of current fiscal policy.

Question 18

Large deficits can retard economic growth.

Accepted Answer

Large deficits can lead to higher levels of government debt, which can increase interest rates, discourage private investment, and reduce economic growth.

Question 19

The structural deficit is determined by established expenditure-transfer policies and tax rates and is independent of the current level of GDP.

Accepted Answer

The structural deficit is determined by long-term policies and tax rates, and is not affected by short-term fluctuations in GDP.

Question 20

Expansionary fiscal policy normally raises interest rates.

Accepted Answer

When the government implements expansionary fiscal policy, it often increases its spending and/or cuts taxes. This increases the demand for borrowing, causing interest rates to rise as lenders seek to capitalize on the increased demand.

Quiz 32: Budget Deficits in the Short and Long Run