Question 1

The economy is in a recession and the federal government is running a deficit. An expansion will

Accepted Answer

An economic expansion typically leads to higher tax revenues and reduced government spending on social safety nets, which can decrease the deficit automatically.

Question 2

During an expansion, tax revenues

Accepted Answer

During an expansion, economic activity increases, leading to higher incomes and profits. This results in higher tax revenues as individuals and businesses pay more taxes. Additionally, with more people employed and earning higher incomes, fewer individuals need government assistance, leading to a decrease in transfer payments such as unemployment benefits.

Question 3

An economy has $20 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $5 billion while government spending is $15 billion. At the end of the year the debt is

Accepted Answer

The economy's debt increases by the difference between government spending ($15 billion) and tax revenues ($5 billion), which is $10 billion. Adding this to the initial debt of $20 billion results in a total debt of $30 billion at the end of the year.

Question 4

There is a cyclical deficit when

Accepted Answer

A cyclical deficit occurs when the economy is underperforming, meaning real GDP is less than potential GDP. This situation typically leads to lower tax revenues and potentially higher government spending on welfare programs, thus creating or increasing a deficit.

Question 5

An economy has $40 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $15 billion while government spending is $5 billion. At the end of the year the debt is

Accepted Answer

The debt decreases because tax revenues ($15 billion) exceed government spending ($5 billion) by $10 billion, reducing the initial debt of $40 billion to $30 billion.

Question 6

What happens automatically if the economy goes into a recession?

Accepted Answer

During a recession, tax revenues usually decrease due to decreased economic activity, while government spending on programs such as unemployment benefits and welfare increases because more people are in need of them. This leads to a larger budget deficit.

Question 7

A government begins the year with a debt of $50 billion, collects $10 billion in tax revenues and spends $4 billion. Debt at the end of the year is

Accepted Answer

The government starts with a debt of $50 billion, collects $10 billion in taxes, and spends $4 billion. The net change in its cash position is $10 billion - $4 billion = $6 billion. This amount reduces the debt, so the end-of-year debt is $50 billion - $6 billion = $44 billion.

Question 8

Which is part of federal government spending?

Accepted Answer

Interest payments on the national debt are a significant part of federal government spending as the government must pay interest on the loans it has taken out to finance past deficits and debts.

Question 9

The cyclical deficit

Accepted Answer

The cyclical deficit arises only because real GDP does not equal potential GDP. This means that during periods of economic downturns, actual output falls below the potential output, resulting in a decrease in tax revenues and an increase in government spending on social safety nets. This leads to a cyclical deficit, which is temporary and disappears as the economy recovers.

Question 10

Automatic stabilizers

Accepted Answer

Automatic stabilizers are built-in features of government spending and tax systems that help stabilize the economy. They are triggered by changes in real GDP, without the need for any action by Parliament. Examples of automatic stabilizers include unemployment insurance, welfare programs, and progressive income tax systems. These stabilizers help to cushion the impact of economic downturns, as they allow government spending and/or tax revenues to automatically adjust in response to changes in the economy.

Question 11

Government should not try to

Accepted Answer

During a recession, government efforts to eliminate budget deficits, typically through spending cuts or tax increases, can further reduce aggregate demand, deepening the recession. It's generally advised for governments to allow deficits to increase or to actively pursue deficit spending to stimulate the economy during such periods.

Question 12

Due to automatic stabilizers, when real GDP increases, the

Accepted Answer

Automatic stabilizers, such as progressive income taxes and unemployment benefits, cause government revenues to increase and expenditures to decrease when the economy is growing, leading to a decrease in the government budget deficit or an increase in the government budget surplus.

Question 13

During a recession, tax revenues

Accepted Answer

During a recession, tax revenues typically fall as businesses and individuals have lower incomes and profits. Transfers, such as unemployment benefits and welfare, tend to increase as more people are out of work and in need of government assistance. Therefore, the best choice is B, as tax revenues fall and transfers increase.

Question 14

There is a structural deficit when government spending is greater than revenue

Accepted Answer

A structural deficit occurs when a government's expenditures exceed its revenues at the point of potential GDP, meaning it's not related to the economic cycle's fluctuations but to the structure of the government's budget policy.

Question 15

All of the following increase the budget deficit except a(n)

Accepted Answer

An increase in GST tax revenues would actually decrease the budget deficit, as it would increase government revenue. All of the other options listed would increase the budget deficit.

Question 16

Income taxes make up almost half of Canada's federal government revenues.

Accepted Answer

According to the most recent data from the Canada Revenue Agency, income taxes contributed 49.6% of the federal government's total revenues in the 2019-2020 fiscal year.

Question 17

Government taxes, transfers and spending work like a thermostat because

Accepted Answer

Like a thermostat, automatic budget surpluses and deficits work to counteract changes in real GDP. For example, during a contraction, tax revenues decrease and transfer payments increase, causing a budget deficit. This deficit acts as a stimulus to the economy by putting more money into people's pockets, which can increase consumer spending and help to boost the economy. Conversely, during an expansion, tax revenues increase and transfer payments decrease, causing a budget surplus. This surplus acts as a restriction on the economy by taking money out of people's pockets, which can slow down consumer spending and help to cool off the economy. Overall, this automatic stabilizer feature of government finances helps to smooth out the ups and downs of the business cycle.

Question 18

A government begins the year with a debt $50 billion, collects $10 billion in tax revenues and spends $30 billion. Debt at the end of the year is

Accepted Answer

The government began with a debt of $50 billion.
They then collected $10 billion in tax revenue, leaving them with $40 billion in debt.
They then spent $30 billion, which increases the debt to $70 billion at the end of the year. Therefore, the correct answer is (C) $70 billion.

Question 19

The structural deficit is the deficit

Accepted Answer

The structural deficit is the deficit that occurs at potential GDP, which is the level of output at full employment. It is not caused by the business cycle, but rather by long-term factors such as entitlement programs and tax policies.

Question 20

The largest source of revenues for the federal government is

Accepted Answer

Personal income taxes are the largest source of revenues for the federal government, accounting for approximately half of all revenues collected.

Quiz 12: Spending Others Money: Fiscal Policy, Deficits, and National Debt