Question 1

Is the following statement true or False? "Citizens should be concerned if a greater proportion of the national debt is held by foreigners." Defend your answer.

Accepted Answer

The answer of Is the following statement true or False?...

Question 2

Which of the following is most likely to be harmed by a large national debt?

Accepted Answer

A college graduate entering the labor force for the first time is most likely to be harmed by a large national debt because it can lead to higher taxes and reduced government spending in the future, potentially affecting job opportunities and economic growth.

Question 3

Some economists argue that federal budget deficits are overstated. Which of the following is not a factor in this overstatement?

Accepted Answer

Social Security surplus is a factor that helps to reduce the federal budget deficit. Therefore, it cannot contribute to an overstatement of the deficit. Inflation, business cycles, and state and local government net balances could all be factors in overstating the federal budget deficit.

Question 4

Jennifer earns an above average income and holds part of her wealth in the form of government bonds. Curtis earns an average income and holds no government bonds. Government increases taxes in order to pay the debt. What is the most likely results?

Accepted Answer

Since Jennifer holds government bonds, she will be directly impacted by the tax increase as the government may reduce the interest payments on the bonds or use the funds from the tax increase to repay the bonds, resulting in a decrease in Jennifer's income. On the other hand, Curtis, who does not hold government bonds, will be less affected by the tax increase. Therefore, income will be redistributed from Curtis to Jennifer. Investment may decrease due to the tax increase, and there is no evidence to suggest that the productive capabilities of the economy will increase.

Question 5

Evaluate the following statement. "Large national debts harm all citizens because they decrease the rate of investment. This will cause the rate of growth of the capital stock to fall, and eventually living standards will fall."

Accepted Answer

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Question 6

Suppose that in an attempt to increase employment, the government increases spending and runs a deficit. As a result of this deficit there is an increase in interest rates. This deficit was most likely financed by:

Accepted Answer

When the Treasury sells bonds to firms and households, it increases the supply of bonds in the market. This leads to an increase in interest rates as investors demand higher returns to compensate for the increased supply. Therefore, option D is the most likely way a deficit is financed that leads to an increase in interest rates. Option A is incorrect because an increase in marginal tax rates reduces disposable income, which tends to decrease spending and employment, and is unlikely to result in an increase in interest rates. Option B is incorrect because when the Treasury sells securities to the Federal Reserve, it increases the money supply, which tends to decrease interest rates, not increase them. Option C is incorrect because when the Federal Reserve sells securities to commercial banks, it does not directly finance the deficit.

Question 7

Explain how the federal government saves the Social Security surplus.

Accepted Answer

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Question 8

Suppose that prior to 1998 the national debt of Utopia was $0. In 1998, the government incurred a deficit of $200 million. In 1999, 2000, and 2001 the government incurred a deficit of $180 million, $140 million, and $130 million, respectively. Currently, what is the national debt of Utopia?

Accepted Answer

The national debt of Utopia is the sum of all the deficits incurred from 1998 to 2001. Adding the deficits for each year: $200 million + $180 million + $140 million + $130 million = $650 million.

Question 9

Use the following diagram to answer the following questions.
 
-Refer to Loanable Funds. If the demand for loanable funds is D₁, the equilibrium interest rate and quantity of funds are:

Accepted Answer

The equilibrium interest rate and quantity of funds are determined at the point where the demand for loanable funds intersects with the supply. If the demand is D₁, then the equilibrium is where D₁ intersects with the supply curve, which corresponds to interest rate i₁ and quantity of funds F₁.

Question 10

Which allocation of the budget surplus would lead to a slow accumulation of the nation's capital stock-eventually causing increases in consumption?

Accepted Answer

Using the surplus to reduce the national debt would free up resources for private investment, which would lead to an increase in the nation's capital stock. Eventually, this would lead to higher levels of consumption as increased investment leads to increased production and productivity. Choices B and C would increase government spending and could lead to higher consumption in the short term, but would not necessarily lead to long-term increases in the capital stock. Choice D would decrease disposable income, leading to a potential decrease in consumption in the short term.

Question 11

A deficit financed by issuing U.S. Treasury bonds to the private sector will have an insignificant effect on the interest rate if:

Accepted Answer

During a severe recession, the demand for loans is typically low because both consumers and businesses are less likely to borrow money. In such an environment, even if the government borrows more (by issuing U.S. Treasury bonds) to finance a deficit, it's less likely to crowd out private borrowing, and thus, the impact on interest rates can be insignificant. This is because there's already a lack of demand for loans, so the additional supply of government bonds doesn't compete as much with the private sector for funds.

Question 12

"One of the biggest problems associated with a large national debt is the burden that occurs when interest and principal are paid to debt holders." Is this statement true or False? Defend your answer.

Accepted Answer

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Question 13

Use the following diagram to answer the following questions.
 
-Refer to Loanable Funds. An increase in the federal budget deficit financed by issuing U.S. Treasury bonds would most likely:

Accepted Answer

An increase in the federal budget deficit financed by issuing U.S. Treasury bonds would increase the supply of loanable funds, which would shift the supply curve to the right, causing the equilibrium rate of interest to fall and the equilibrium quantity of funds supplied to increase. This, in turn, would cause the demand for loanable funds to increase, shifting the demand curve from D₁ to D₂.

Question 14

Use the following diagram to answer the following questions.
 
-Refer to Loanable Funds. A shift in financing of the federal budget deficit away from public debt to internal financing would most likely:

Accepted Answer

A shift in financing of the federal budget deficit away from public debt to internal financing would increase the supply of loanable funds, causing the equilibrium rate of interest to fall from i₂ to i₁ and the equilibrium quantity of funds supplied to increase.

Question 15

Use the following diagram to answer the following questions.
 
-Refer to Loanable Funds. Suppose the demand for loanable funds is initially D₁ and the supply of loanable funds is S. If the interest rate is currently greater than i₁, then:

Accepted Answer

When the interest rate is above the equilibrium (i₁), the quantity of loanable funds supplied exceeds the quantity demanded, leading to a surplus. This surplus puts downward pressure on the interest rate, causing it to decrease until equilibrium is reached.

Question 16

In which instance would it be most desirable for government to borrow?

Accepted Answer

Government borrowing can be justified if it is used for investments that have the potential to generate future economic growth and benefits to society. Building a new highway system is an example of such an investment, as it can improve transportation connectivity, facilitate commerce, and create jobs. In contrast, borrowing to finance current or recurring expenses, such as farm surpluses, Social Security, or welfare benefits, is generally viewed as unsustainable in the long run and can lead to a higher debt burden for future generations.

Question 17

A deficit financed by issuing U.S. Treasury bonds to the private sector will:

Accepted Answer

Issuing U.S. Treasury bonds to finance a deficit typically attracts foreign investment, increasing demand for the dollar. This appreciation of the dollar makes U.S. exports more expensive relative to foreign goods, thereby increasing the relative price of exports.

Question 18

Evaluate the following statement. "Older generations have less of a stake in decreasing the national debt than do younger generations."

Accepted Answer

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Question 19

The government is justified in running a deficit and financing it by issuing U.S. Treasury bonds to the private sector when:

Accepted Answer

During the contractionary phase of the business cycle, the government may need to increase spending to stimulate the economy and reduce unemployment. However, if the government were to attempt to finance this spending solely through taxation, it could exacerbate the contraction by reducing private sector spending. Therefore, running a deficit and financing it through the issuance of Treasury bonds can help to reduce the contractionary effects of reduced private spending without restricting government spending. Additionally, during times of economic contraction, interest rates are typically lower, making it more affordable for the government to finance its debt through bonds.

Question 20

Suppose the federal government incurs a deficit because the economy enters a recession. In attempts to balance the budget, Congress enacts a temporary increase in marginal tax rates. This policy will:

Accepted Answer

Increasing marginal tax rates during a recession is likely to reduce disposable income and decrease aggregate demand, worsening the recession. This can lead to a further decrease in tax revenues and may not be an effective way to balance the budget.

Quiz 15: Sustained Budget Deficits: Is This Any Way to Run a Government