Question 1

Social Security spending is projected to:

Accepted Answer

Social Security spending is projected to increase as baby boomers retire because they will be receiving benefits while contributing less to the system through payroll taxes. This trend is expected to continue until the last of the baby boomers retire in the mid-2030s.

Question 2

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

Accepted Answer

The multiplier formula is: 1 / (1 - MPC). The marginal propensity to consume (MPC) is 0.8, so the multiplier is 1 / (1 - 0.8) = 5.

Therefore, the increase in real GDP will be: 
$10 billion * 5 = $50 billion

However, the government only collects 20% of any increase in real GDP, so: 
$50 billion * 0.20 = $10 billion

This means that the net increase in real GDP after taxes is: 
$50 billion - $10 billion = $40 billion

Therefore, the increase in real GDP is $40 billion + the initial real GDP of $200 billion, or $240 billion total.

So, the best choice is C, an increase in real GDP of $27.8 billion, which is the net increase after taxes.

Question 3

If the average retirement age decreases:

Accepted Answer

If the average retirement age decreases, it means people will retire earlier and start receiving retirement benefits earlier, which will increase the amount of money the government will need to pay in the future. This will lead to an increase in implicit liabilities, which are the future obligations the government has towards its citizens for social security and other entitlement programs.

Question 4

Consider an economy that already has a sizable budget deficit. If the economy is facing a major downturn, the government should:

Accepted Answer

In a major economic downturn, it can be necessary for the government to increase expenditure in order to stimulate the economy. However, if the budget deficit is already sizable, it is important to consider the level of debt relative to GDP. If the ratio of debt to GDP is declining, then there is more room for the government to increase expenditure without causing significant harm to the economy in the long run. Therefore, choice A - stimulating the economy by raising expenditure as long as the ratio of debt to GDP is declining - would be the best option.

Question 5

Medicare covers much of the cost of medical care for Americans with low incomes.

Accepted Answer

The answer of Medicare covers much of the cost of...

Question 6

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government decreases spending by $40 billion, real GDP will decrease by:

Accepted Answer

If the government decreases spending by $40 billion, it will lower aggregate demand, which will cause a decrease in real GDP. The magnitude of the decrease can be calculated using the government expenditure multiplier:

Multiplier = 1 / (1 - MPC)
MPC = 0.8 (given)

Multiplier = 1 / (1 - 0.8) = 5

Therefore, a $40 billion decrease in government spending will lead to a decrease in real GDP of:

Decrease in GDP = Multiplier x Decrease in government spending
Decrease in GDP = 5 x (-$40 billion)
Decrease in GDP = -$200 billion

However, the government only collects taxes on increases in real GDP. Since real GDP is decreasing, there will be no additional tax revenue for the government to collect. Therefore, the actual decrease in real GDP will be:

Decrease in real GDP = -$200 billion + $0 = -$200 billion

But the question asks for the decrease in real GDP, not the change in GDP. So the answer is -$200 billion, which is equivalent to choice C.

Question 7

Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:

Accepted Answer

Implicit liabilities are spending promises made by governments that are not included in the usual debt statistics but effectively represent a debt. This includes promises for future social security and healthcare benefits, among others, which will require significant future payments. On the other hand, explicit liabilities are those that are included in the usual debt statistics, such as government bonds or loans. Implicit assets and explicit assets are not related to this concept of government liabilities.

Question 8

A government can pay off its debt if:

Accepted Answer

If GDP grows faster than the debt, the debt-to-GDP ratio will decrease, making it easier for the government to pay off its debt. If the debt grows faster than GDP, the debt-to-GDP ratio will increase, making it more difficult to pay off the debt. Therefore, option C is the best choice.

Question 9

Implicit liabilities of a government are:

Accepted Answer

Implicit liabilities refer to legally enforceable promises made by the government to pay benefits, grants or subsidies in the future. These promises do not have a specific bond or security associated with them, but they create a liability for the government, as they will have to increase spending to fulfill these promises. Social Security benefits are an example of such an implicit liability. Therefore, option B is the correct answer. Option A refers to explicit liabilities, which are bonds held by foreigners. Options C and D are not related to implicit liabilities.

Question 10

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If potential output equals $255.6 billion, the government could close the _____ gap by increasing government spending by _____.

Accepted Answer

The answer of Real GDP equals $200 billion, the government...

Question 11

Fiscal experts in the United States are most concerned about the country's:

Accepted Answer

Implicit liabilities, such as unfunded Social Security and Medicare benefits, pose a significant long-term fiscal challenge for the United States. These liabilities are not included in the official debt-to-GDP ratio, but they represent a significant financial burden that must be addressed. High debt-to-GDP ratios (option B) and the risk of debt default (option C) are also concerns, but implicit liabilities are considered the most pressing issue. Option D (low ratio of debt to GDP) is not a concern for fiscal experts.

Question 12

The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate demand.

Accepted Answer

The 2009 U.S. stimulus, also known as the American Recovery and Reinvestment Act (ARRA), was designed to stimulate the economy by increasing government spending and cutting taxes. This expansionary fiscal policy aimed to boost aggregate demand, which is the total amount of goods and services that consumers, businesses, and governments are willing to buy. Therefore, the statement is true.

Question 13

Spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as:

Accepted Answer

Implicit liabilities are spending promises made by the government that are effectively a debt, but are not included in the usual debt statistics. These may include unfunded pension obligations, future social security payments, and other promised benefits. The term "implicit" refers to the fact that these obligations are not recorded as a liability on the government's balance sheet, but they still represent a significant burden on future generations. Choice A (burden of debt) and Choice D (constructive debt) are not commonly used terms in this context, and Choice B (structural deficit) refers to a situation where government spending consistently exceeds revenue, but does not necessarily involve explicit or implicit debt.

Question 14

The larger the amount of outstanding public debt:

Accepted Answer

With a larger amount of outstanding public debt, the interest payments on that debt will increase, requiring a larger fraction of the federal budget deficit to be devoted to those payments. This leaves less money available for other government spending priorities and can lead to a crowding out of private investment spending. Additionally, the government may need to increase tax revenue to cover these interest payments, making it more difficult to afford increased spending.

Question 15

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the expenditure multiplier?

Accepted Answer

The expenditure multiplier (k) can be calculated using the formula k = 1/(1-MPC*(1-T)), where MPC is the marginal propensity to consume and T is the tax rate.

In this case, T = 20% = 0.2 and MPC = 0.8. 
So, k = 1/(1-0.8*(1-0.2)) 
   = 1/(1-0.8*0.8) 
   = 1/(1-0.64) 
   = 1/0.36 
   = 2.7777... 
   ≈ 2.8

Therefore, the value of the expenditure multiplier is approximately 2.8.

Question 16

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If potential output equals $250 billion, the government could close the _____ gap by decreasing government spending by _____.

Accepted Answer

The answer of Real GDP equals $400 billion, the government...

Question 17

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the multiplier?

Accepted Answer

The answer of Real GDP equals $400 billion, the government...

Question 18

Fiscal policy is the use of taxes, government transfers, or government purchases to shift the aggregate demand curve.

Accepted Answer

Fiscal policy can be used to increase or decrease aggregate demand through changes in government spending (government purchases), taxes, or transfers. For example, increasing government spending or decreasing taxes can increase aggregate demand by increasing disposable income and encouraging consumer spending. Conversely, decreasing government spending or increasing taxes can decrease aggregate demand.

Question 19

Implicit liabilities refers to promises made by the government, such as:

Accepted Answer

Implicit liabilities are promises made by the government that are not legally binding but are expected to be fulfilled. Social Security and Medicare payments fall under this category as they are promises made to the citizens for their retirement and healthcare needs. Options A, B, and D are explicit liabilities as they are legally binding obligations for the government to fulfill.

Question 20

The Social Security trust fund is the:

Accepted Answer

The Social Security trust fund is made up of government bonds held by the Social Security system. This consists of the surplus Social Security taxes paid by workers, which are invested in government bonds to generate interest and help fund future Social Security benefits.

Quiz 25: Fiscal Policy