Question 1

If the government were required to balance the budget during a recession, it would have to decrease taxes and increase government spending.

Accepted Answer

During a recession, decreasing taxes and increasing government spending are typically used as a fiscal policy to stimulate the economy. Requiring the government to balance the budget during a recession would restrict their ability to use these tools to combat the economic downturn.

Question 2

The cyclically balanced budget is an estimate of what the budget balance would be during a recessionary gap with real GDP less than potential output.

Accepted Answer

A cyclically balanced budget refers to a budget that is balanced over the economic cycle, accounting for periods of both recession and expansion, not just during a recessionary gap.

Question 3

Lower government transfers or higher taxes make a budget surplus smaller or a budget deficit larger.

Accepted Answer

Lower government transfers or higher taxes typically increase a budget surplus or reduce a budget deficit by decreasing government spending or increasing revenue.

Question 4

If the government were required to balance the budget during a recession, it would have to increase taxes and decrease government spending.

Accepted Answer

Balancing the budget during a recession typically involves increasing taxes and decreasing spending to offset deficits, which can further contract the economy.

Question 5

Most economists believe that the government should balance the budget on average, allowing deficit years when the economy is in recession to be offset by surpluses during years of expansion.

Accepted Answer

Most economists believe that the government should balance the budget on average, allowing deficit years when the economy is in recession to be offset by surpluses during years of expansion. This approach helps to stabilize the economy and maintain long-term economic growth.

Question 6

The business cycle and the budget balance are unrelated.

Accepted Answer

The business cycle and the budget balance are related because the state of the economy can impact government revenue and spending, which affects the budget balance. In a recession, government revenue may decrease due to lower tax revenue and increased spending on programs such as unemployment benefits, leading to a larger budget deficit. In contrast, during economic expansion, tax revenue may increase and government spending on social programs may decrease, leading to a smaller budget deficit or even a budget surplus.

Question 7

Changes in the budget balance may be the result of economic policy, or they may be caused by fluctuations in the economy.

Accepted Answer

Economic policy decisions, such as changes in tax rates or government spending levels, can impact the budget balance. However, changes in the economy, such as a recession or a period of rapid economic growth, can also affect the budget balance through changes in tax revenue and government spending on programs like unemployment benefits.

Question 8

In most years since 1970, the actual budget deficit has been more than 25% of GDP.

Accepted Answer

This statement is false. The actual budget deficit as a percentage of GDP has only exceeded 25% in extreme circumstances, such as during World War II when large-scale military spending was necessary. In most years since 1970, the actual budget deficit has been below 10% of GDP.

Question 9

Fiscal policy measures of the same dollar amounts will have equal effects on the budget balance but may change real GDP by different amounts.

Accepted Answer

Fiscal policy measures can have different multiplier effects on the economy depending on their design and timing. This means that measures of the same dollar amounts may lead to different changes in real GDP, depending on factors such as the effectiveness of the measure in stimulating demand, the degree of spare capacity in the economy, and the potential crowding-out effects of increased government borrowing. However, in terms of their impact on the budget balance, measures of the same dollar amounts will have equal effects, assuming all other factors are equal.

Question 10

Most economists oppose an annually balanced budget because it would undermine automatic stabilizers.

Accepted Answer

Most economists believe that an annually balanced budget would limit the government's ability to utilize automatic stabilizers such as unemployment benefits and tax adjustments, which are deemed necessary in times of economic downturns.

Question 11

In 1999 many European countries signed a stability pact in which they agreed to accept the dollar as their common currency.

Accepted Answer

This statement is false. The Euro was adopted as the common currency for many European countries in 1999, not the US dollar.

Question 12

The budget deficit usually decreases when the unemployment rate increases.

Accepted Answer

The budget deficit typically increases when unemployment rate increases as a result of decreased tax revenues and increased spending on social welfare programs such as unemployment benefits.

Question 13

The cyclically balanced budget deficit doesn't fluctuate as much as the actual budget deficit.

Accepted Answer

The cyclically balanced budget deficit is designed to remain more stable by adjusting for economic cycles and changes in the business cycle. This means that it should fluctuate less than the actual budget deficit, which is affected by changing economic conditions and policy decisions that are made on an ongoing basis.

Question 14

The main problem with the European stability pacts of 1999 and 2011 was that they forced countries to follow contractionary fiscal policies during a recession to keep the budget deficit to the required level.

Accepted Answer

The European stability pacts of 1999 and 2011 indeed required countries to maintain a budget deficit below a certain limit, even during a recession. This meant that countries had to implement austerity measures or contractionary fiscal policies, such as cutting public spending and raising taxes, to meet the deficit target. However, these policies often worsened the recession by reducing demand and increasing unemployment, which ultimately made it harder for countries to repay their debt. Thus, the stability pacts were criticized for exacerbating the economic downturn and hindering the recovery.

Question 15

Most economists oppose a constitutional amendment requiring the federal budget to be balanced annually.

Accepted Answer

Many economists argue that a balanced budget amendment would limit the government's ability to respond to economic downturns and emergencies, and could lead to drastic spending cuts or tax increases during recessions. They also argue that fiscal policy should not be constrained by a rigid rule, but should be flexible enough to adapt to changing economic conditions.

Question 16

The cyclically balanced budget is an estimate of what the budget balance would be if real GDP were exactly equal to potential output.

Accepted Answer

The cyclically balanced budget is based on the premise of balancing the budget in the long run, assuming that real GDP is equal to potential output over the course of the business cycle.

Question 17

In 2011 many European countries signed a stability pact in which they agreed to keep their structural budget balanced.

Accepted Answer

The answer of In 2011 many European countries signed a...

Question 18

An increase in government transfer payments of $100 billion and a tax cut of $100 billion will have equal effects on the budget balance and unequal effects on real GDP.

Accepted Answer

The answer of An increase in government transfer payments of...

Question 19

Higher government transfers or lower taxes make a budget surplus smaller or a budget deficit larger.

Accepted Answer

Higher government transfers (which increase spending) and lower taxes (which decrease revenue) both contribute to a larger budget deficit, meaning that the budget surplus becomes smaller or turns into a deficit.

Question 20

In 1999 many European countries signed a stability pact in which they agreed to limit their actual budget deficits to less than 3% of their country's GDP.

Accepted Answer

This statement is true. The stability pact, officially known as the Stability and Growth Pact, was signed by European countries in 1999 with the aim of promoting fiscal discipline and stability in the Eurozone. The pact required member countries to limit their budget deficits to less than 3% of their GDP and to strive for a balanced budget or surplus. However, the pact has faced criticism and challenges over the years, particularly during times of economic crisis.

Quiz 13: Fiscal Policy Appendix Taxes and the Multiplier