Question 1

According to the functional finance approach,providing jobs and price stability is more important than balancing the budget.

Accepted Answer

Functional finance approach argues that government should focus on achieving full employment and price stability rather than focusing on balancing the budget. The approach emphasizes that the government should use fiscal policy as a tool to ensure the economy functions at its full potential, which may entail deficit spending if necessary.

Question 2

The burden of a nation's debt falls if interest rates fall.

Accepted Answer

When interest rates fall, the cost of borrowing money decreases. This can lead to lower interest payments on the government's debt, easing the burden on the nation's finances.

Question 3

The U.S.public debt is about 90% of its GDP.

Accepted Answer

As of my last update in 2023, the U.S. public debt is over 120% of its GDP, indicating a higher ratio than the 90% mentioned.

Question 4

Interest paid on externally held debt does not pose a burden on our economy.

Accepted Answer

Interest paid on externally held debt does pose a burden on the economy because it involves payments to foreign creditors and can contribute to an outflow of currency, which can impact exchange rates and the overall balance of trade. Additionally, the need to make interest payments can reduce the funds available for domestic investment and other government priorities.

Question 5

Annually balancing the federal budget has been the prevailing approach since the 1930s.

Accepted Answer

Annually balancing the federal budget has not been the prevailing approach since the 1930s. Deficit spending has been common practice, particularly during times of economic recession or war.

Question 6

If the government borrows from the public,the quantity of publicly held bonds decreases.

Accepted Answer

If the government borrows from the public, the quantity of publicly held bonds increases, as the public is lending money to the government by purchasing those bonds. If the government were to pay off those bonds, then the quantity of publicly held bonds would decrease.

Question 7

Of the share of the U.S.national debt that is held by the public,foreigners hold nearly the same amount as do Americans.

Accepted Answer

According to the U.S. Treasury Department, as of August 2021, approximately 28% of the U.S. national debt held by the public is owned by foreign entities, while approximately 72% is owned by Americans. Therefore, foreigners hold nearly the same amount as Americans, but not exactly the same.

Question 8

Countries such as China often purchase U.S.debt to keep their currencies from falling against the U.S.dollar.

Accepted Answer

Countries like China purchase U.S. debt to keep their currencies from appreciating too much against the U.S. dollar, which helps maintain their export competitiveness.

Question 9

One argument against using taxation to pay off the public debt is that it will redistribute wealth from richer bondholders to poorer people who do not own bonds.

Accepted Answer

This statement is incorrect. Using taxation to pay off the public debt does not necessarily redistribute wealth from richer bondholders to poorer people who do not own bonds. In fact, it can have a minimal impact on wealth redistribution, as the distribution of bond ownership is not solely determined by income or wealth. Furthermore, reducing the national debt can have positive effects on economic growth and stability, which can benefit all individuals regardless of their bond ownership status.

Question 10

Trying to annually balance the federal budget during a recession may worsen the economy.

Accepted Answer

During a recession, the government should increase spending and reduce taxes to stimulate economic growth. Attempting to balance the budget during a recession by cutting spending or increasing taxes can worsen the economy by reducing consumer demand and causing job losses.

Question 11

One argument against using taxation to pay off the public debt is that it will redistribute wealth from people who do not hold bonds to bondholders.

Accepted Answer

Taxation would require individuals who do not hold bonds to contribute to paying off the debt, which would ultimately benefit bondholders. This would result in a redistribution of wealth from non-bondholders to bondholders.

Question 12

Economists in favor of the functional finance approach to balancing the federal budget believe that the first priority of lawmakers is to keep the economy at full employment with stable prices,not to balance the federal budget.

Accepted Answer

Economists in favor of functional finance prioritize maintaining full employment and stable prices, and they argue that balancing the federal budget should come as a secondary concern.

Question 13

Externally held debt is owed to noncitizens.

Accepted Answer

Externally held debt refers to debt that is owed to noncitizens or foreign entities.

Question 14

Asset sales represent a large fraction of government finance in the United States.

Accepted Answer

Asset sales are not a significant source of government finance in the United States. The primary sources of government revenue include taxes, fees, and borrowing through the issuance of treasury securities.

Question 15

The sale of Treasury bills by the Federal Reserve monetizes the federal debt.

Accepted Answer

The sale of Treasury bills by the Federal Reserve is a monetary policy tool used to control the money supply and interest rates, not to monetize the federal debt. Monetizing the debt would involve the Federal Reserve buying government securities directly from the Treasury, not selling them.

Question 16

Externally held debt is public debt held by foreigners.

Accepted Answer

Externally held debt refers to public debt held by foreign investors, governments or entities. This is in contrast to domestically held debt, which is owned by citizens, organizations, or the government within the same country.

Question 17

If the federal deficit was $3 trillion,economic growth was 2%,and the unemployment rate was 10%,a functional finance economist would suggest increasing taxes in order to balance the budget.

Accepted Answer

A functional finance economist would prioritize maintaining full employment and promoting economic growth over balancing the budget. They would instead recommend increasing government spending to create jobs and stimulate the economy, even if it means running a deficit.

Question 18

One goal of cyclically balancing the federal budget is to increase spending and decrease taxes when the economy is booming to reduce the chance of overheating the economy.

Accepted Answer

The goal of cyclically balancing the federal budget is to decrease spending and increase taxes during economic booms to prevent overheating, and to increase spending and decrease taxes during recessions to stimulate the economy.

Question 19

Countries such as China often purchase U.S.debt to help manage their exchange rates against the U.S.dollar.

Accepted Answer

China and other countries often purchase U.S. debt, such as Treasury bonds, as a way to invest their surplus funds and to help manage their exchange rates against the U.S. dollar. This allows them to maintain a stable currency and avoid fluctuations in value that could significantly impact their economy.

Question 20

The burden of a nation's debt rises if interest rates fall.

Accepted Answer

The burden of a nation's debt generally decreases when interest rates fall, as it becomes less expensive for the government to borrow money. However, if the debt consists of variable rate loans, the interest rate decrease could lead to a decrease in debt service payments and lead to an increase in the outstanding debt.

Quiz 10: Fiscal Policy and Debt