Question 1

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 2

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

Accepted Answer

A large debt-to-GDP ratio causes crowding out, which means that the government has to spend more on debt interest payments and has less money available for other important priorities such as education, healthcare, and infrastructure. This can lead to a decrease in economic growth and competitiveness.

Question 3

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 downturns through deficit spending, potentially leading to further economic instability. Therefore, it could serve as an automatic destabilizer.

Question 4

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

The cyclically adjusted budget takes into account the effects of the business cycle on government revenue and spending. A higher cyclically adjusted surplus suggests that the economy is operating above potential, meaning that actual GDP is higher than potential GDP. Therefore, if the actual budget has a surplus of $75 billion, but the cyclically adjusted surplus is only $50 billion, it implies that the economy is above potential GDP.

Question 5

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

Accepted Answer

The total value of U.S. Treasury bonds outstanding is equivalent to the federal government debt. This debt represents the cumulative amount of money borrowed by the federal government over time, including both outstanding bonds and other forms of debt such as bills, notes, and other securities.

Question 6

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 7

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 8

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

Accepted Answer

Long-lived capital expenditures, such as the purchase of equipment or construction of a building, provide benefits over many years. It therefore makes sense to spread the burden of paying for them over the useful life of the asset. Borrowing to finance these expenditures allows a business to obtain the benefits of the asset immediately while paying for it over time. This spreads the cost out and makes it more manageable, rather than having to pay for the entire asset up front.

Question 9

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

Accepted Answer

When the federal budget deficit increases, it means that the government is spending more money than it is collecting in revenue. This results in the government having to borrow more money to finance its spending, which adds to the federal government debt.

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

When taxes are increased and government spending is reduced, it leads to a decrease in disposable income and therefore a decrease in consumer spending. This decrease in consumer spending leads to a decrease in aggregate demand. Due to the decrease in aggregate demand, businesses are likely to reduce their production levels, which would lead to a decrease in real GDP and employment.

Question 11

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 Refer to the Article Summary.When does the...

Question 12

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 13

The budget deficit increases during wars and recessions.

Accepted Answer

During wars and recessions, the government typically spends more on defense, economic stimulus programs, and safety net programs, while tax revenue may decrease due to lower economic activity. This leads to an increase in the budget deficit.

Question 14

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

Accepted Answer

According to the U.S. Treasury Department, approximately two-thirds of the federal government's debt is held by government agencies such as the Social Security Administration and Federal Reserve System. The remaining portion is held by individuals, foreign governments, and private institutions.

Question 15

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 collects in revenue, resulting in an increase in the debt. When the federal government runs a surplus, it collects more revenue than it spends, resulting in a decrease in the debt. Therefore, the correct choice is C.

Question 16

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 17

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 18

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

Accepted Answer

Economists argue that when the economy is at its potential GDP, borrowing funds for investment goods, such as infrastructure, research and development, and education, can lead to long-term economic growth and offset any short-term costs. Investing in these areas can increase productivity, create jobs, and improve overall economic performance. Borrowing for consumption goods, social security benefits, or healthcare costs may provide immediate benefits, but they do not provide long-term economic growth.

Question 19

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 20

The cyclically adjusted budget is calculated at potential GDP.

Accepted Answer

The cyclically adjusted budget is calculated at potential GDP, which is the level of output that the economy can produce without generating inflationary pressures. This measure takes into account the effects of business cycles on government revenues and expenditures, and provides a more accurate assessment of a government's fiscal position than the nominal budget.

Quiz 16: Fiscal Policy