Question 1

In the medium run,a tax increase that causes a reduction in the budget deficit will
A)affect only the price level.
B)not affect the price level but will alter the composition of output.
C)not affect the level of output, but will affect the composition of output.
D)affect both the level and composition of output.

Accepted Answer

In the medium run, a tax increase that reduces the budget deficit can lead to changes in the composition of output (e.g., between public and private sector production) without necessarily affecting the overall level of output, as the economy adjusts to the new fiscal conditions.

Question 2

The official measure of the deficit becomes more inaccurate as
A)the inflation rate rises.
B)the total debt falls.
C)taxes rise.
D)all of the above
E) none of the above

Accepted Answer

The official measure of the deficit, which is based on nominal dollar amounts, becomes more inaccurate as the inflation rate rises because it does not account for the decrease in the value of money over time. As a result, the real deficit may be higher than what is reported. Choices B and C are incorrect as they do not affect the accuracy of the deficit measurement.

Question 3

If the government runs a primary deficit in year zero of B₀,and decides to repay it in year t (i.e.,bring the debt back down to its pre-existing level),then in year t it must run a primary surplus equal to
A)zero.
B)one.
C)B₀.
D)B₀(1 + r).
E) none of the above

Accepted Answer

E

Question 4

In the medium run,a tax cut that causes an increase in the budget deficit will affect which of the following?
A)the level of output but not its composition
B)both the level and composition of output
C)only the composition of output
D)only the price level
E) none of the above

Accepted Answer

The answer of In the medium run,a tax cut that...

Question 5

The government budget constraint tells us that the budget deficit is equal to
A)interest on the debt.
B)the primary deficit.
C)the primary deficit plus interest on the debt.
D)imports minus exports.
E) the primary deficit plus the trade deficit plus interest on the debt.

Accepted Answer

The government budget constraint states that the budget deficit is equal to the sum of the primary deficit and the interest paid on the government debt. Therefore, option C, which states that the budget deficit is equal to the primary deficit plus interest on the debt, is the correct answer. Option A is incorrect as it refers only to the interest paid on the debt, without including the primary deficit. Options B and E are also incorrect, as they do not include the interest paid on the debt. Option D is incorrect as it is unrelated to the government budget constraint.

Question 6

The debt ratio will increase by more in any given year when
A)the real interest rate is lower.
B)the growth rate of GDP is higher.
C)the initial debt ratio is greater.
D)all of the above
E) none of the above

Accepted Answer

The initial debt ratio is the most important determinant of how much the debt ratio will increase in any given year. This is because a higher initial debt ratio means that interest payments on the debt will be a larger proportion of government spending, leaving less room for other expenditures. The real interest rate and growth rate of GDP can also affect the debt ratio, but their impact is smaller compared to the initial debt ratio.

Question 7

When the economy is in a liquidity trap,which of the following is not correct?
A)A reduction in the interest rate can be used to increase output.
B)Fiscal policy is more important.
C)Interest rate is zero.
D)Large increases in spending and cuts in taxes were not enough to avoid the recession.

Accepted Answer

In a liquidity trap, even if the central bank reduces the interest rate to zero, it may not stimulate borrowing and investment, as people prefer to hold onto cash rather than investing in assets. Therefore, A is not correct. On the other hand, B and D are correct, as fiscal policy becomes more important, and conventional monetary policy becomes ineffective. C is also correct, as the interest rate is near zero in a liquidity trap.

Question 8

The primary deficit is
A)government spending minus interest on the debt.
B)government spending minus net tax revenues.
C)government spending plus interest on the debt minus net tax revenues.
D)government spending plus net tax revenues minus interest on the debt.
E) interest on the debt minus net tax revenues.

Accepted Answer

The primary deficit is the difference between government spending and net tax revenues, excluding interest payments on the national debt. Therefore, choice B is the correct answer.

Question 9

In the short run,an increase in government spending that causes an increase in the budget deficit
A)affects the level of output but not its composition.
B)affects both the level and composition of output.
C)affects only the price level.
D)is neutral.
E) none of the above

Accepted Answer

The answer of In the short run,an increase in government...

Question 10

If the government runs a primary deficit in year zero of B₀,and,in year 1,decides to stabilize the debt (i.e.,prevent the deficit from rising any further),then in year 1 and beyond,it must run a primary surplus equal to
A)zero.
B)B₀.
C)(1 + r)B₀.
D)r)
E) none of the above

Accepted Answer

The answer of If the government runs a primary deficit...

Question 11

The official measure of the deficit
A)always underestimates the correct measure of the deficit when inflation is positive.
B)differs from the correct measure by the inflation rate times taxes.
C)depends on the nominal interest rate.
D)depends on the real interest rate.
E) none of the above

Accepted Answer

The answer of The official measure of the deficit
A)always underestimates...

Question 12

The "official measure" of the deficit (the one reported by the government)
A)tells us the change in government nominal debt.
B)is equal to nominal interest payments on the debt plus the primary deficit.
C)overestimates the real budget deficit whenever the inflation rate is positive.
D)all of the above
E) none of the above

Accepted Answer

The "official measure" of the deficit includes all the elements mentioned: it reflects the change in government nominal debt, comprises nominal interest payments on the debt plus the primary deficit, and tends to overestimate the real budget deficit when there is positive inflation.

Question 13

All else equal,a rise in the debt-to-GDP ratio implies
A)a greater ratio of interest payments to GDP.
B)a greater difference between the official and correct measures of the deficit as a fraction of GDP.
C)a greater surplus is needed to prevent further rises in the debt-to-GDP ratio.
D)all of the above
E) none of the above

Accepted Answer

A rise in the debt-to-GDP ratio implies all of the mentioned outcomes: it leads to a greater ratio of interest payments to GDP as the government needs to service a larger debt; it can cause a greater difference between the official and correct measures of the deficit as a fraction of GDP, especially if interest payments are not fully accounted for; and it indicates that a greater surplus is needed to prevent further rises in the debt-to-GDP ratio, as the government must generate enough surplus to cover interest payments and reduce the principal.

Question 14

Since the early 1980s,debt ratios for the OECD countries have
A)increased.
B)remained constant.
C)decreased slightly.
D)decreased dramatically, and are now close to zero.
E) become impossible to define.

Accepted Answer

The statement mentions that debt ratios for the OECD countries have been increasing since the early 1980s, which means that the correct choice is A.

Question 15

The debt-ratio is the ratio of the debt to
A)government spending.
B)saving.
C)taxes.
D)personal disposable income.
E) GDP.

Accepted Answer

The debt-ratio is commonly used to measure a country's debt level, and is calculated by dividing the total government debt by the country's GDP. This ratio is important as it indicates the level of indebtedness of a country relative to its economic output. Therefore, E is the most appropriate choice as it relates to the country's overall economic activity.

Question 16

In the medium run,an increase in government spending that causes an increase in the budget deficit
A)affects the level of output but not its composition.
B)affects both the level and composition of output.
C)will not affect the composition of output but will affect the price level.
D)is neutral.
E) none of the above

Accepted Answer

The answer of In the medium run,an increase in government...

Question 17

The deficit (as a fraction of GDP)is anticipated to rise over the next several decades due to projections of
A)increased defense spending.
B)increased spending on entitlements.
C)increased inflation.
D)decreased corporate tax revenues.
E) decreased income tax revenues.

Accepted Answer

Entitlement programs, such as Social Security and Medicare, are projected to grow in cost as the population ages and health care costs rise. This is expected to lead to an increase in government spending and therefore contribute to a higher deficit as a percentage of GDP.

Question 18

A higher deficit in the current year will lead to increased debt in the future only if
A)the deficit is greater than the previous year's deficit.
B)the deficit-to-GDP ratio is greater than the debt-to-GDP ratio.
C)it causes a drop in private saving.
D)it causes an increase in private saving.
E) none of the above

Accepted Answer

A higher deficit will lead to increased debt in the future regardless of the conditions mentioned in the other options. The deficit itself, if not offset by surpluses or other measures, contributes to the national debt.

Question 19

In 2010,the deficit-to-GDP ratio for the United States was approximately equal to
A)10%.
B)17%.
C)37%.
D)67%.

Accepted Answer

In 2010, the deficit-to-GDP ratio for the United States was approximately 10%. This means that the government's budget deficit was 10% of the total value of goods and services produced by the economy in that year. This was a high ratio compared to previous years, but still significantly lower than the other options (B, C, and D) which are all much higher percentages.

Question 20

A major reason to be concerned about any U.S.budget deficit is that
A)if it were maintained, it would lead to an ever-increasing debt-to-GDP ratio.
B)it would exacerbate the problem of the low U.S. saving rate.
C)under current legislation, it would lead to budget surpluses in the future.
D)if it were to increase, Ricardian equivalence will no longer hold.
E) since large deficits are associated with wars, the deficit might encourage the U.S. to become more adventuristic in its foreign policy.

Accepted Answer

The answer of A major reason to be concerned about...

Quiz 22: Fiscal Policy: a Summing up

In the medium run,a tax increase that causes a reduction in the budget deficit will

The official measure of the deficit becomes more inaccurate as

If the government runs a primary deficit in year zero of B₀,and decides to repay it in year t (i.e.,bring the debt back down to its pre-existing level) ,then in year t it must run a primary surplus equal to

In the medium run,a tax cut that causes an increase in the budget deficit will affect which of the following?

The government budget constraint tells us that the budget deficit is equal to

The debt ratio will increase by more in any given year when

When the economy is in a liquidity trap,which of the following is not correct?

The primary deficit is

In the short run,an increase in government spending that causes an increase in the budget deficit

If the government runs a primary deficit in year zero of B₀,and,in year 1,decides to stabilize the debt (i.e.,prevent the deficit from rising any further) ,then in year 1 and beyond,it must run a primary surplus equal to

The official measure of the deficit

The "official measure" of the deficit (the one reported by the government)

All else equal,a rise in the debt-to-GDP ratio implies

Since the early 1980s,debt ratios for the OECD countries have

The debt-ratio is the ratio of the debt to

In the medium run,an increase in government spending that causes an increase in the budget deficit

The deficit (as a fraction of GDP) is anticipated to rise over the next several decades due to projections of

A higher deficit in the current year will lead to increased debt in the future only if

In 2010,the deficit-to-GDP ratio for the United States was approximately equal to

A major reason to be concerned about any U.S.budget deficit is that