Question 1

Between 1960 and 1997, the federal budget was never in surplus.

Accepted Answer

Between 1960 and 1997, the federal budget was in surplus during the late 1990s, specifically from 1998 to 2001.

Question 2

The national debt in the U.S. is a much larger percentage of our annual GDP than in similar industrial countries such as Canada, Sweden, and Australia.

Accepted Answer

According to data from the World Bank, the national debt as a percentage of GDP in the U.S. was 106.09% in 2019, while it was 89.72% in Canada, 35.63% in Sweden, and 41.52% in Australia. Therefore, the statement is true.

Question 3

The way to prevent the national debt from growing is for the budget not to be in deficit.

Accepted Answer

If the budget is not in deficit, it means that the government is not spending more than it is taking in. This would prevent the national debt from growing.

Question 4

A concern about crowding out caused by increased government borrowing is that:

Accepted Answer

Crowding out can lead to a decline in business investment spending, which can result in lower rates of economic growth. This occurs as the government's increased demand for funds raises interest rates, making it more expensive for businesses to borrow money and invest in new projects.

Question 5

The federal government never has to pay off the national debt.

Accepted Answer

The national debt represents the amount of money that the government owes to its creditors (e.g. individuals, corporations, foreign governments). As the government continues to borrow money to finance its operations, the national debt grows larger. However, the government does not have a legal obligation to pay off the entire national debt at once. Instead, it aims to balance its annual budget by collecting enough revenue to cover its expenses and reduce the deficit. This means that the national debt will continue to exist, but its size may fluctuate over time.

Question 6

"Crowding out" refers to federal government deficits financed by:

Accepted Answer

Crowding out occurs when the federal government increases deficits by borrowing which increases interest rates. This reduces private spending because borrowing becomes more expensive for individuals and businesses. Therefore, option A is the correct answer.

Question 7

Supply-siders feel that high levels of government spending:

Accepted Answer

Supply-siders believe that high levels of government spending can lead to crowding out, which occurs when the government borrows funds, causing interest rates to rise and decreasing the amount of available credit for private investment. This, in turn, leads to lower levels of private sector investment.

Question 8

The U.S. Treasury is responsible for preparing and submitting the initial budget recommendation to the president.

Accepted Answer

The Office of Management and Budget (OMB) is responsible for preparing and submitting the initial budget recommendation to the president. The Treasury Department assists with the process, but does not have primary responsibility.

Question 9

"Crowding in" refers to federal government deficits:

Accepted Answer

Crowding in refers to the idea that government deficits can stimulate economic growth by spurring private investment. When the government invests in public infrastructure, it can create new opportunities for businesses to grow and create jobs. This can offset any declines in business investment that may be caused by the deficit. Crowding out, on the other hand, is when government deficits reduce private business and consumption spending, which can lead to declines in economic growth. Therefore, the choice A is the best answer as it is the only one that accurately reflects the concept of crowding in.

Question 10

Which of the following statements about crowding out is false ?

Accepted Answer

Crowding out affects both interest rates and economic growth. It occurs when increased government borrowing (usually resulting from a budget deficit) leads to higher interest rates, which in turn can reduce private investment and therefore economic growth. Choice A is true: a budget surplus would not lead to crowding out. Choice B is also true: crowding out is caused by a budget deficit. Choice C is partially true: crowding out can reduce the multiplier effect, but not completely offset it.

Question 11

The crowding-out effect can be:

Accepted Answer

The crowding-out effect can vary in magnitude; it can be zero, partial, or complete, depending on the economic context and the extent to which government spending affects private investment.

Question 12

Critics of Keynesian fiscal policy argue that deficit spending will not stimulate the economy, because higher interest rates will discourage consumption and investment. This argument is known as the:

Accepted Answer

The argument that deficit spending will lead to higher interest rates and therefore discourage consumption and investment is known as the crowding-out effect. This is because when the government borrows money to finance its spending, it increases the demand for loanable funds and puts upward pressure on interest rates, which in turn reduces private investment and consumption.

Question 13

Since 1960, the federal government has never had two years in a row of budget surpluses.

Accepted Answer

The federal government had consecutive years of budget surpluses from 1998 to 2001.

Question 14

Crowding out occurs when the federal government:

Accepted Answer

Crowding out occurs when the government borrows to finance a deficit, which increases demand for loanable funds, thus driving up interest rates and crowding out private investment.

Question 15

Supply-side economists argue that less government spending:

Accepted Answer

Supply-side economists argue that less government spending would make more investment capital available at lower rates of interest to the private sector, which would encourage investment and economic growth. This is based on the belief that reducing government involvement in the economy will lead to increased efficiency and productivity.

Question 16

Crowding out refers to the situation in which:

Accepted Answer

Crowding out occurs when increased government borrowing leads to higher interest rates, reducing the funds available for private investment. This reduction in private investment can lead to a decrease in economic growth and job creation. Choice B is not relevant to the concept of crowding out. Choice C is unlikely because the federal government borrowing wouldn't directly impact state and local taxes. Choice D is partially correct but not accurate in explaining the full concept of crowding out.

Question 17

Supply-siders argue that:

Accepted Answer

Supply-siders argue that increased government spending can lead to higher interest rates, which can crowd out private sector investment.

Question 18

The federal budget deficit has been over 30 percent of GDP since the early 1980s.

Accepted Answer

The federal budget deficit has not been over 30 percent of GDP since the early 1980s. The highest it has been during that time period was 6 percent in 1983.

Question 19

Which of the following statements about crowding out is true ?

Accepted Answer

Crowding out occurs when government borrowing leads to higher interest rates, reducing private investment. It can offset the multiplier effect, is caused by budget deficits, and is not caused by budget surpluses.

Question 20

When crowding out occurs, higher government spending results in higher interest rates, which in turn results in:

Accepted Answer

When higher government spending leads to higher interest rates, it becomes more expensive for individuals and businesses to borrow money for consumption and investment, causing them to reduce their spending. This reduction in consumer and private investment spending is known as crowding out.

Quiz 17: Federal Deficits, Surpluses, and the National Debt