Question 1

Financing a budget deficit by ______ leads to inflation,and inflation ______ the real value of government debt.

Accepted Answer

The answer of Financing a budget deficit by ______ leads...

Question 2

A rule that the government must balance the cyclically adjusted budget would I: allow the government to carry on a limited countercyclical fiscal policy.II: keep the debt-to-GDP ratio from rising in the long run.

Accepted Answer

Balancing the cyclically adjusted budget allows for countercyclical fiscal policy by adjusting for economic cycles, and it helps stabilize the debt-to-GDP ratio over time by preventing excessive debt accumulation.

Question 3

Tax smoothing is a desirable policy because it:

Accepted Answer

Tax smoothing refers to the practice of keeping taxes relatively constant over time, rather than changing them drastically in response to changes in the economy or government spending. This helps to reduce the distortions of incentives caused by taxes, as taxpayers are able to plan for the future with greater certainty if they know that tax rates will remain stable. Tax smoothing may also help to reduce budget deficits in the long run, as it promotes a more stable fiscal environment. However, it is not necessarily consistent with a balanced budget in the short term, as it may involve running deficits or surpluses in certain years in order to smooth out tax rates over time.

Question 4

One way to shift the tax burden from the current generation to future generations is to finance a war by:

Accepted Answer

Running a budget deficit means that the government is spending more money than it is collecting in taxes. This means that it is borrowing money, usually in the form of government bonds, from investors and institutions. This debt must be paid back with interest, meaning that future generations will bear the burden of repaying it. Financing a war through deficit spending, therefore, shifts the tax burden from the current generation to future generations.

Question 5

A measure of the expected rate of inflation can be found by the:

Accepted Answer

The answer of A measure of the expected rate of...

Question 6

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly,and both generations follow the life-cycle consumption pattern but are not altruistically linked:

Accepted Answer

The answer of If the government levies a one-time temporary...

Question 7

In Canada,a rule precluding budget deficits is currently in force for:

Accepted Answer

Some provincial governments in Canada have rules or legislation in place that preclude budget deficits, but this is not the case for all provinces or the federal government.

Question 8

Using fiscal policy,including automatic stabilizers,to stabilize output over a business cycle is not consistent with:

Accepted Answer

A strict balanced-budget rule could prevent the government from using fiscal policy to stabilize output because it requires that government spending and revenue are equal. In contrast, automatic stabilizers are built into the tax and transfer system and can automatically adjust government revenues and expenditures in response to changes in the economy, providing stabilization without violating a balanced-budget rule. The other choices are consistent with using fiscal policy to stabilize output over the business cycle. Rational expectations imply that people's expectations of future economic conditions are reflected in their current economic decisions; inflation targeting involves using monetary policy to keep inflation within a target range; and the natural-rate hypothesis suggests that there is a certain level of unemployment that the economy will tend to return to in the long run, even if it experiences short-term fluctuations in output.

Question 9

One reason for not requiring a balanced federal budget at all times is that with a balanced-budget rule:

Accepted Answer

In a recession, the government needs to increase its spending to stimulate the economy. If a balanced-budget rule was in place, the government would not be able to do so, and the economy would suffer even more. The automatic stabilizing powers of our system of taxes and transfers would not be able to work effectively in this situation. Therefore, not requiring a balanced federal budget at all times can be helpful in such scenarios.

Question 10

The real value of government debt is reduced by:

Accepted Answer

Unexpected inflation reduces the real value of government debt because the nominal amount of the debt remains the same, but its real value is decreased by the increase in the price level. In contrast, expected inflation would be factored into the interest rate on the debt, so it would not result in a reduction of the real value of the debt. Deflation, whether expected or unexpected, would increase the real value of government debt.

Question 11

A strict balanced-budget rule would:

Accepted Answer

The answer of A strict balanced-budget rule would:
...

Question 12

The experience of most Western countries in the 1980s:

Accepted Answer

The experience of Western countries in the 1980s can be used to argue both in favor and against the Ricardian equivalence view of tax cuts. Some argue that the low national saving at the time contradicts the Ricardian equivalence view, while others argue that the optimistic attitude reflected in the stock market supports the view. Therefore, option D is the best choice.

Question 13

The possibility of capital flight is likely to be greater at higher levels of government debt because there is a greater:

Accepted Answer

A higher level of government debt increases the temptation to default on the debt, which in turn can lead to capital flight as investors opt to move their capital to more stable and secure investment destinations.

Question 14

Monetary policy is linked to fiscal policy when government spending is financed by:

Accepted Answer

The answer of Monetary policy is linked to fiscal policy...

Question 15

High levels of government debt that raise investors' fear of a government default on debt will result in capital ______ and a(n)______ of the country's exchange rate.

Accepted Answer

High levels of government debt increase the risk of default, which makes investors fearful about the performance of the country's economy. This leads to capital outflows, as investors withdraw their investment, resulting in a depreciation of the country's exchange rate.

Question 16

To force politicians to judge whether government spending is worth the costs,some economists have argued for:

Accepted Answer

A balanced-budget rule for fiscal policy would require politicians to offset any increase in spending with an equal increase in revenue. This would force them to consider the costs of government spending and make more informed decisions about where to allocate resources. It would also help prevent excessive government borrowing and the accumulation of debt. The other options listed are either not directly related to the issue of government spending or are less effective in addressing the problem.

Question 17

Indexed bonds produce all of the benefits except:

Accepted Answer

Indexed bonds do not directly lead to lower rates of inflation; they are designed to protect investors from inflation by adjusting the principal or interest payments based on an inflation index.

Question 18

If government debt reduction by a small open economy has no effect on its interest rate I: the benefits of debt reduction follow from the fact that future generations have smaller debt service payments to foreigners.II: the benefits of debt reduction will be charged by all workers since each worker has more capital to work with.

Accepted Answer

If government debt reduction by a small open economy has no effect on its interest rate, then the benefits of debt reduction would come from the fact that future generations have smaller debt service payments to foreign lenders. This is the idea presented in statement I and is true. However, statement II is not true as debt reduction does not necessarily lead to an increase in capital per worker.

Question 19

Inflation-indexed government bonds have all of the following benefits except:

Accepted Answer

Inflation-indexed government bonds do not eliminate inflation; they are designed to protect investors from the effects of inflation by adjusting the value of the bond payments based on inflation rates.

Question 20

To minimize the disincentives of very high taxes,a policy of tax smoothing requires a budget ______ in years of unusually low income and a budget ______ in years of unusually high expenditures.

Accepted Answer

The answer of To minimize the disincentives of very high...

Quiz 16: Government Debt and Budget Deficits

Financing a budget deficit by leads to inflation,and inflation the real value of government debt.

A rule that the government must balance the cyclically adjusted budget would I: allow the government to carry on a limited countercyclical fiscal policy.II: keep the debt-to-GDP ratio from rising in the long run.

Tax smoothing is a desirable policy because it:

One way to shift the tax burden from the current generation to future generations is to finance a war by:

A measure of the expected rate of inflation can be found by the:

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly,and both generations follow the life-cycle consumption pattern but are not altruistically linked:

In Canada,a rule precluding budget deficits is currently in force for:

Using fiscal policy,including automatic stabilizers,to stabilize output over a business cycle is not consistent with:

One reason for not requiring a balanced federal budget at all times is that with a balanced-budget rule:

The real value of government debt is reduced by:

A strict balanced-budget rule would:

The experience of most Western countries in the 1980s:

The possibility of capital flight is likely to be greater at higher levels of government debt because there is a greater:

Monetary policy is linked to fiscal policy when government spending is financed by:

High levels of government debt that raise investors' fear of a government default on debt will result in capital and a(n) of the country's exchange rate.

To force politicians to judge whether government spending is worth the costs,some economists have argued for:

Indexed bonds produce all of the benefits except:

Inflation-indexed government bonds have all of the following benefits except:

To minimize the disincentives of very high taxes,a policy of tax smoothing requires a budget in years of unusually low income and a budget in years of unusually high expenditures.

Quiz 16: Government Debt and Budget Deficits

Financing a budget deficit by ______ leads to inflation,and inflation ______ the real value of government debt.

A rule that the government must balance the cyclically adjusted budget would I: allow the government to carry on a limited countercyclical fiscal policy.II: keep the debt-to-GDP ratio from rising in the long run.

Tax smoothing is a desirable policy because it:

One way to shift the tax burden from the current generation to future generations is to finance a war by:

A measure of the expected rate of inflation can be found by the:

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly,and both generations follow the life-cycle consumption pattern but are not altruistically linked:

In Canada,a rule precluding budget deficits is currently in force for:

Using fiscal policy,including automatic stabilizers,to stabilize output over a business cycle is not consistent with:

One reason for not requiring a balanced federal budget at all times is that with a balanced-budget rule:

The real value of government debt is reduced by:

A strict balanced-budget rule would:

The experience of most Western countries in the 1980s:

The possibility of capital flight is likely to be greater at higher levels of government debt because there is a greater:

Monetary policy is linked to fiscal policy when government spending is financed by:

High levels of government debt that raise investors' fear of a government default on debt will result in capital ______ and a(n) ______ of the country's exchange rate.

To force politicians to judge whether government spending is worth the costs,some economists have argued for:

Indexed bonds produce all of the benefits except:

Inflation-indexed government bonds have all of the following benefits except:

To minimize the disincentives of very high taxes,a policy of tax smoothing requires a budget ______ in years of unusually low income and a budget ______ in years of unusually high expenditures.

Financing a budget deficit by leads to inflation,and inflation the real value of government debt.

High levels of government debt that raise investors' fear of a government default on debt will result in capital and a(n) of the country's exchange rate.

To minimize the disincentives of very high taxes,a policy of tax smoothing requires a budget in years of unusually low income and a budget in years of unusually high expenditures.