Question 1

The majority of the federal government debt is held by government agencies.

Accepted Answer

As of 2021, over 40% of the federal government debt is held by government agencies, such as the Social Security Trust Fund and the Federal Reserve. The rest is held by individuals, institutions, and foreign governments.

Question 2

Accumulating debt poses a problem for the U.S.federal government because

Accepted Answer

A large debt-to-GDP ratio causes crowding out, meaning that borrowing by the government reduces funds available for private investment, resulting in slower economic growth. This can lead to more borrowing in the future to finance the deficit, creating a cycle of increasing debt. While the debt does ultimately have to be paid off, the U.S. government is not in danger of defaulting on its debt. Building roads and bridges can yield benefits, but their cost should be carefully evaluated to ensure they are a worthwhile investment.

Question 3

Suppose the government wants to maintain a balanced budget.To achieve this goal,when the economy falls into recession government would need to ________ taxes,which would cause aggregate demand to ________.

Accepted Answer

To maintain a balanced budget during a recession, the government would need to increase taxes to offset decreased tax revenues from lower economic activity. Increasing taxes, however, would decrease aggregate demand by reducing the amount of income available for consumers to spend.

Question 4

The total value of U.S.Treasury bonds outstanding equals

Accepted Answer

U.S. Treasury bonds are issued to finance the federal government's debt, so the total value of U.S. Treasury bonds outstanding equals the federal government debt.

Question 5

Article Summary
In a letter to Congress,Treasury Secretary Jacob Lew stated that the United States will run out of money by November 3 unless the $18.1 trillion debt limit was raised.Many Republicans want to use the debt limit as a negotiating point with the White House to get concessions on government spending,and the White House has stated that it will not negotiate with Republicans over the debt limit.Raising the debt limit allows the government to borrow in order to pay current debts,but does not approve new spending by the government.Without an agreement about raising the debt limit,the government could face a shut-down in mid-December,when government funding expires.
-Refer to the Article Summary.When does the Treasury Department borrow? Why would the Treasury have to borrow more than it estimated,as was indicated by its letter to Congress to raise the debt ceiling? When would the Treasury repay what it borrowed,and who is it repaying?

Accepted Answer

The answer of Article Summary
In a letter to Congress,Treasury Secretary...

Question 6

How could the existence of an unemployment insurance system or other transfer programs have reduced the severity of the Great Depression?

Accepted Answer

The answer of How could the existence of an unemployment...

Question 7

Some economists argue that the federal government should normally run a deficit at potential GDP,with the borrowed funds applied to

Accepted Answer

Borrowed funds should typically be invested in capital goods and infrastructure projects that will improve the economy's productive capacity and generate future returns, rather than being spent on current consumption goods or ongoing expenses such as social security or healthcare costs. This approach can help stimulate economic growth and increase the overall standard of living in the long run.

Question 8

Borrowing to pay for long-lived capital expenditures makes sense as

Accepted Answer

Long-lived capital expenditures, such as investments in infrastructure or machinery, typically provide benefits over a number of years. It therefore makes sense to spread the cost of these expenditures over multiple years as well, rather than paying for them all in the current year. Borrowing money to pay for these types of expenditures allows for the cost to be spread out over time, which aligns with the benefits received.

Question 9

If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2,does it follow that the federal government acted to raise taxes or cut government spending in Year 2?

Accepted Answer

The answer of If the federal budget goes from a...

Question 10

The nation of Hyperbole is in a recession,and the government decides to increase taxes and reduce government spending to reduce the growing deficit.This will ________ aggregate demand and will likely ________ real GDP and employment.

Accepted Answer

Increasing taxes and reducing government spending will decrease aggregate demand as consumers will have less disposable income and businesses will have less government contracts. This will likely result in a decrease in real GDP and employment as businesses will have to cut back on production and potentially lay off workers.

Question 11

The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus.

Accepted Answer

When the federal government runs a deficit, it spends more money than it takes in through taxes and other revenue sources, thus it needs to borrow money to finance its spending. This increase in borrowing leads to an increase in the federal government debt. On the other hand, when the federal government runs a surplus, it takes in more money than it spends, allowing it to pay down some of its debt and reducing the overall amount of federal government debt.

Question 12

Increasing the federal budget deficit will contribute to increasing the federal government debt.

Accepted Answer

The federal budget deficit is the amount by which government spending exceeds government revenue in a given year. When the deficit is added to the existing federal government debt, it contributes to the overall increase in the debt. Therefore, increasing the federal budget deficit will increase the federal government debt.

Question 13

The federal government debt as a percentage of GDP did not rise

Accepted Answer

During the 1960s, the federal government debt as a percentage of GDP was relatively stable and did not see the significant increases that occurred during the Great Depression, World War II, or the 1980s.

Question 14

During most of the years of the Great Depression,the actual federal budget was in ________,and the cyclically adjusted budget was in ________.

Accepted Answer

The answer of During most of the years of the...

Question 15

The cyclically adjusted budget is calculated at potential GDP.

Accepted Answer

The cyclically adjusted budget (CAB) is a budget measure that adjusts for the effects of the business cycle on government revenues and expenditures. It is calculated at potential GDP, which is the level of GDP that would be produced if all resources were fully utilized. This allows for a more accurate assessment of the government's fiscal position, as it takes into account the impact of economic fluctuations.

Question 16

Assume a country is required by law to balance the budget every year.Suppose aggregate demand falls,causing a recession and a budget deficit.To balance the budget,what would the government need to do with the level of government spending and taxes? How would these changes in government spending and taxes affect aggregate demand and the economy?

Accepted Answer

The answer of Assume a country is required by law...

Question 17

In Year 1 suppose the economy is at potential GDP and that the federal budget deficit equals $100 billion.In Year 2 the federal budget deficit rises to $150 billion,but the cyclically adjusted budget deficit falls to $75 billion.How can the actual budget deficit rise and the cyclically adjusted budget deficit fall?

Accepted Answer

The answer of In Year 1 suppose the economy is...

Question 18

The budget deficit increases during wars and recessions.

Accepted Answer

During wars and recessions, the government tends to spend more on military operations or economic stimulus measures, while also receiving less revenue due to lower economic activity. This leads to an increase in the budget deficit.

Question 19

If the federal budget has an actual budget surplus of $75 billion,but a cyclically adjusted budget surplus of $50 billion,then the economy must be above potential real GDP.

Accepted Answer

A cyclically adjusted budget takes into account the natural fluctuations in the economy, adjusting for changes in employment and output. If the actual budget surplus is greater than the cyclically adjusted surplus, it suggests the economy is performing better than expected (above potential real GDP).

Question 20

A law requiring the government to balance its budget in each year would serve as an automatic destabilizer.

Accepted Answer

Requiring the government to balance its budget in each year would limit the government's ability to respond to economic shocks and emergencies. It could force the government to cut spending or raise taxes at a time when the economy is already struggling, further exacerbating the problem. This could lead to a cycle of recession and austerity measures, making the economy more unstable in the long run.

Quiz 27: Fiscal Policy