Question 1

The "official measure" of the deficit (the one reported by the government)
A)tells us the change in government nominal debt.
B)is equal to nominal interest payments on the debt plus the primary deficit.
C)overestimates the real budget deficit whenever the inflation rate is positive.
D)all of the above
E)none of the above

Accepted Answer

The "official measure" of the deficit includes all the elements mentioned: it reflects the change in government nominal debt, comprises nominal interest payments on the debt plus the primary deficit, and tends to overestimate the real budget deficit when there is positive inflation.

Question 2

If the government runs a primary deficit in year zero of B0,and,in year 1,decides to stabilize the debt (i.e.,prevent the deficit from rising any further),then in year 1 and beyond,it must run a primary surplus equal to
A)zero.
B)B0.
C) (1+r)B0.
D)r.
E)none of the above

Accepted Answer

D

Question 3

A higher deficit in the current year will lead to increased debt in the future only if
A)the deficit is greater than the previous year's deficit.
B)the deficit-to-GDP ratio is greater than the debt-to-GDP ratio.
C)it causes a drop in private saving.
D)it causes an increase in private saving.
E)none of the above

Accepted Answer

E

Question 4

The Ricardian equivalence proposition states that an increase in the deficit causes
A)consumption to decrease.
B)savings to decrease.
C)investment to decrease.
D)all of the above
E)none of the above

Accepted Answer

The Ricardian equivalence proposition argues that when the government increases its deficit spending, individuals will recognize that future taxes will have to increase to pay off the debt, and therefore will save more to prepare for those future taxes. This increase in saving will offset any potential increase in consumption or investment, meaning that there will be no impact on either of these variables. Therefore, none of the options listed in the question are correct.

Question 5

If the Ricardian equivalence proposition is correct,then
A)deficits harm future generations.
B)deficits reduce investment spending.
C)deficits stimulate the economy in the short run.
D)all of the above
E)none of the above

Accepted Answer

The Ricardian equivalence proposition suggests that government deficits do not affect the level of demand in an economy because individuals anticipate future taxes that will be needed to pay off the debt. They save more to pay for these future taxes, offsetting the increase in demand that the deficit spending was supposed to create. Therefore, it argues against the traditional views that deficits harm future generations, reduce investment spending, or stimulate the economy in the short run.

Question 6

The official measure of the deficit becomes more inaccurate as
A)the inflation rate rises.
B)the total debt falls.
C)taxes rise.
D)all of the above
E)none of the above

Accepted Answer

The inflation rate affects the purchasing power of money, which in turn affects the accuracy of the deficit measurement. As inflation rises, the value of money decreases, making deficit measurement less accurate. The total debt and tax rates do not directly affect the accuracy of the deficit measurement.

Question 7

The debt ratio will increase by more in any given year when
A)the real interest rate is lower.
B)the growth rate of GDP is higher.
C)the initial debt ratio is greater.
D)all of the above
E)none of the above

Accepted Answer

The debt ratio is calculated by dividing the government's outstanding debt by its GDP. Therefore, the initial debt ratio plays a significant role in determining the change in the debt ratio each year. A higher initial debt ratio means that any increase in the government's outstanding debt will have a more significant impact on the debt ratio. The real interest rate and the growth rate of GDP will also impact the debt ratio, but their impact will be relatively small compared to the initial debt ratio.

Question 8

If the government thinks the natural unemployment rate is 5%,when it is really 6%,then the government will
A)overestimate the actual deficit.
B)underestimate the actual deficit.
C)overestimate the cyclically adjusted deficit.
D)underestimate the cyclically adjusted deficit.
E)none of the above

Accepted Answer

If the government believes the natural unemployment rate is lower than it actually is, it will likely overestimate tax revenues and underestimate welfare payments, leading to an overestimation of the cyclically adjusted deficit. This is because the cyclically adjusted deficit takes into account the economic cycle's position, and with a higher actual unemployment rate, the economy is likely performing below potential, which isn't fully accounted for.

Question 9

If the Ricardian equivalence proposition is correct,then an increase in the deficit will lead to
A)an increase in private saving.
B)a decrease in investment spending.
C)a lower standard of living in the future.
D)all of the above
E)none of the above

Accepted Answer

The Ricardian equivalence proposition suggests that when the government increases its deficit, individuals anticipate future taxes to pay off this debt and thus increase their savings to offset the expected future tax burden, leaving their consumption and investment plans unchanged.

Question 10

Using taxes to finance a war,rather than deficits,
A)leads to a greater future capital stock.
B)is generally not proposed by economists.
C)shares less of the burden of the war with future generations.
D)all of the above
E)none of the above

Accepted Answer

The answer of Using taxes to finance a war,rather than...

Question 11

If the government runs a primary deficit in year zero of B0,and decides to repay it in year t (i.e.,bring the debt back down to its pre-existing level),then in year t it must run a primary surplus equal to
A)zero.
B)one.
C)B0.
D)B0(1+r).
E)none of the above

Accepted Answer

The answer of If the government runs a primary deficit...

Question 12

The large increases in the deficit during the 1980s in the United States were associated with
A)large increases in public saving.
B)no change in public saving.
C)large increases in private saving.
D)all of the above
E)none of the above

Accepted Answer

The large increases in the deficit during the 1980s in the United States were not associated with any significant changes in public or private saving.

Question 13

The official measure of the deficit
A)always underestimates the correct measure of the deficit when inflation is positive.
B)differs from the correct measure by the inflation rate times taxes.
C)depends on the nominal interest rate.
D)depends on the real interest rate.
E)none of the above

Accepted Answer

The answer of The official measure of the deficit
A)always underestimates...

Question 14

Which of the following would increase the cyclically adjusted deficit?
A)an increase in income.
B)a decrease in income.
C)an increase in the primary deficit.
D)a decrease in the primary deficit.
E)none of the above

Accepted Answer

The answer of Which of the following would increase the...

Question 15

The debt-ratio is the ratio of the debt to
A)government spending.
B)saving.
C)taxes.
D)personal disposable income.
E)GDP.

Accepted Answer

The debt-to-GDP ratio is used to measure a country's debt relative to its economic output. It is a common metric used to assess a country's ability to service its debt obligations.

Question 16

The United States financed the additional government spending during World War II through
A)an increase in the deficit.
B)an increase in taxes.
C)an increase in imports.
D)increases in both the deficit and taxes.
E)increases in both the deficit and imports.

Accepted Answer

The United States financed the additional government spending during World War II through increases in both the deficit and taxes. The government increased tax rates and introduced new taxes, such as the Victory Tax, to generate revenue. However, these increases were not enough to cover the massive costs of the war effort, so the government also borrowed heavily and ran large budget deficits.

Question 17

The primary deficit is
A)government spending minus interest on the debt.
B)government spending minus net tax revenues.
C)government spending plus interest on the debt minus net tax revenues.
D)government spending plus net tax revenues minus interest on the debt.
E)interest on the debt minus net tax revenues.

Accepted Answer

The primary deficit is the difference between government spending and net tax revenues, excluding interest payments on the national debt. This measure allows policymakers to assess the government's fiscal health without the influence of interest payments, which are a result of past decisions and not current economic conditions. Choice B, government spending minus net tax revenues, is the correct definition of the primary deficit.

Question 18

Since the early 1980s,debt ratios for the OECD countries have
A)increased.
B)remained constant.
C)decreased slightly.
D)decreased dramatically,and are now close to zero.
E)become impossible to define.

Accepted Answer

The statement "debt ratios for the OECD countries have increased" indicates that the debt ratios have gone up, implying that the debt levels have gone higher than the previous years.

Question 19

All else equal,a rise in the debt-to-GDP ratio implies
A)a greater ratio of interest payments to GDP.
B)a greater difference between the official and correct measures of the deficit as a fraction of GDP.
C)a greater surplus is needed to prevent further rises in the debt-to-GDP ratio.
D)all of the above
E)none of the above

Accepted Answer

A rise in the debt-to-GDP ratio implies all of the mentioned outcomes: it leads to a greater ratio of interest payments to GDP as the government needs to service a larger debt; it can cause a greater difference between the official and correct measures of the deficit as a fraction of GDP, especially if interest payments are not fully accounted for; and it indicates that a greater surplus is needed to prevent further rises in the debt-to-GDP ratio, as the government must generate enough surplus to cover interest payments and reduce the principal.

Question 20

The government budget constraint tells us that the budget deficit is equal to
A)interest on the debt.
B)the primary deficit.
C)the primary deficit plus interest on the debt.
D)imports minus exports.
E)the primary deficit plus the trade deficit plus interest on the debt.

Accepted Answer

The government budget constraint states that the government's spending (including interest payments on the debt) must be financed by its revenue (taxes) and by issuing debt. Thus, the budget deficit is equal to the difference between spending (including interest payments) and revenue, which is the primary deficit plus interest on the debt. Options A, B, D, and E are not correct as they do not include interest payments on the debt.

Quiz 23: Fiscal Policy: a Summing up

The "official measure" of the deficit (the one reported by the government)

If the government runs a primary deficit in year zero of B0,and,in year 1,decides to stabilize the debt (i.e.,prevent the deficit from rising any further) ,then in year 1 and beyond,it must run a primary surplus equal to

A higher deficit in the current year will lead to increased debt in the future only if

The Ricardian equivalence proposition states that an increase in the deficit causes

If the Ricardian equivalence proposition is correct,then

The official measure of the deficit becomes more inaccurate as

The debt ratio will increase by more in any given year when

If the government thinks the natural unemployment rate is 5%,when it is really 6%,then the government will

If the Ricardian equivalence proposition is correct,then an increase in the deficit will lead to

Using taxes to finance a war,rather than deficits,

If the government runs a primary deficit in year zero of B0,and decides to repay it in year t (i.e.,bring the debt back down to its pre-existing level) ,then in year t it must run a primary surplus equal to

The large increases in the deficit during the 1980s in the United States were associated with

The official measure of the deficit

Which of the following would increase the cyclically adjusted deficit?

The debt-ratio is the ratio of the debt to

The United States financed the additional government spending during World War II through

The primary deficit is

Since the early 1980s,debt ratios for the OECD countries have

All else equal,a rise in the debt-to-GDP ratio implies

The government budget constraint tells us that the budget deficit is equal to