Question 1

The difference between the official and correct measures of the deficit will be greater:

Accepted Answer

A)  the higher is the level of debt. 
B)  the lower is taxes. 
C)  the lower is the level of debt. 
D)  the lower is inflation. 
E)  the lower is government spending. 
A)  the higher is the level of debt. 
B)  the lower is taxes. 
C)  the lower is the level of debt. 
D)  the lower is inflation. 
E)  the lower is government spending. A

Question 2

First, define and explain the cyclically adjusted deficit. Second, explain what effect a recession caused, for example, by a decrease in consumer confidence will have on the size of the cyclically adjusted deficit.

Accepted Answer

The cyclically adjusted deficit is the deficit that would occur if the economy were operating at the natural level of output. In terms of notation, it would be represented as G - T0 - tYn where T0 is autonomous taxes, Yn is the natural level of output, and t is the average income tax rate. Deviations in output from Yn will not cause changes in the cyclically adjusted deficit. So, a consumption- led recession will have no effect on this particular measure of the budget.

Question 3

The Ricardian Equivalence proposition suggests that a tax increase that causes a budget surplus will:

Accepted Answer

A)  decrease in investment. 
B)  increase in investment. 
C)  cause a reduction in output. 
D)  cause an increase in output. 
E)  cause no change in output. 
A)  decrease in investment. 
B)  increase in investment. 
C)  cause a reduction in output. 
D)  cause an increase in output. 
E)  cause no change in output. E

Question 4

Suppose the central bank increases the rate of growth of the money supply. What effect will this increase in money growth have on seignorage in: (1) the short run; and (2) the medium run? Explain.

Accepted Answer

Since seignorage equals the rate of grow

Question 5

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

Accepted Answer

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

Question 6

The debt ratio is the ratio of the debt to:

Accepted Answer

A)  government spending. 
B)  income. 
C)  GDP. 
D)  taxes. 
E)  saving. 
A)  government spending. 
B)  income. 
C)  GDP. 
D)  taxes. 
E)  saving.

Question 7

Which of the following would increase the cyclically adjusted deficit?

Accepted Answer

A)  A decrease in income. 
B)  An increase in the primary surplus. 
C)  An increase in income. 
D)  A decrease in the primary deficit. 
E)  An increase in the primary deficit. 
A)  A decrease in income. 
B)  An increase in the primary surplus. 
C)  An increase in income. 
D)  A decrease in the primary deficit. 
E)  An increase in the primary deficit.

Question 8

The most extreme hyperinflation of the 20th century occurred in:

Accepted Answer

A)  Asia. 
B)  Africa. 
C)  Europe. 
D)  Latin America. 
E)  North America. 
A)  Asia. 
B)  Africa. 
C)  Europe. 
D)  Latin America. 
E)  North America.

Question 9

The debt- to- GDP ratio will tend to decline over time when:

Accepted Answer

A)  the primary deficit increases. 
B)  the initial level of debt increases. 
C)  the primary surplus decreases. 
D)  r  g. 
A)  the primary deficit increases. 
B)  the initial level of debt increases. 
C)  the primary surplus decreases. 
D)  r  g.

Question 10

The difference between the official and correct measures of the deficit will be greater:

Accepted Answer

A)  the lower is output growth. 
B)  the lower is inflation. 
C)  the higher is inflation. 
D)  the higher is output growth. 
E)  the lower is the level of debt. 
A)  the lower is output growth. 
B)  the lower is inflation. 
C)  the higher is inflation. 
D)  the higher is output growth. 
E)  the lower is the level of debt.

Question 11

Suppose the Ricardian Equivalence proposition holds (i.e., it is correct). What does this imply about the ability of fiscal policy to affect GDP? Explain.

Accepted Answer

The Ricardian Equivalence proposition de

Question 12

The official measure of the deficit:

Accepted Answer

A)  depends on the nominal interest rate. 
B)  depends on the real interest rate. 
C)  always underestimates the correct measure of the deficit when inflation is positive. 
D)  differs from the correct measure by the inflation rate times taxes. 
E)  differs from the correct measure by the inflation rate times government spending. 
A)  depends on the nominal interest rate. 
B)  depends on the real interest rate. 
C)  always underestimates the correct measure of the deficit when inflation is positive. 
D)  differs from the correct measure by the inflation rate times taxes. 
E)  differs from the correct measure by the inflation rate times government spending.

Question 13

The official measure of the deficit is represented by which of the following expressions?

Accepted Answer

A)  iB + G - T. 
B)  rB - G + T. 
C)  iB + T - G. 
D)  (i - n)B + G - T. 
E)  uB + G - T. 
A)  iB + G - T. 
B)  rB - G + T. 
C)  iB + T - G. 
D)  (i - n)B + G - T. 
E)  uB + G - T.

Question 14

What is a haircut?

Accepted Answer

A)  The private sector agrees to a discount on the debt they are owed. 
B)  Borrowers agree to a discount on the debt they are owed. 
C)  Central banks agree to a discount on the debt they are owed. 
D)  Lenders agree to a discount on the debt they are owed. 
E)  Governments agree to a discount on the debt they are owed. 
A)  The private sector agrees to a discount on the debt they are owed. 
B)  Borrowers agree to a discount on the debt they are owed. 
C)  Central banks agree to a discount on the debt they are owed. 
D)  Lenders agree to a discount on the debt they are owed. 
E)  Governments agree to a discount on the debt they are owed.

Question 15

Which of the following is common to all hyperinflations?

Accepted Answer

A)  High trade deficits. 
B)  High budget deficits. 
C)  Liquidity traps. 
D)  Credible monetary policy. 
E)  Disinflation. 
A)  High trade deficits. 
B)  High budget deficits. 
C)  Liquidity traps. 
D)  Credible monetary policy. 
E)  Disinflation.

Question 16

The primary deficit is represented by which of the following?

Accepted Answer

A)  iB + G - T. 
B)  rB + G - T. 
C)  rB - G + T. 
D)  G - T. 
E)  iB - G + T. 
A)  iB + G - T. 
B)  rB + G - T. 
C)  rB - G + T. 
D)  G - T. 
E)  iB - G + T.

Question 17

In the medium run, a fiscal contraction that causes a decrease in the budget deficit:

Accepted Answer

A)  affects the level of output but not its composition. 
B)  affects both the level and composition of output. 
C)  will not affect the composition of output but will affect the price level. 
D)  is neutral. 
E)  affects only the composition of output. 
A)  affects the level of output but not its composition. 
B)  affects both the level and composition of output. 
C)  will not affect the composition of output but will affect the price level. 
D)  is neutral. 
E)  affects only the composition of output.

Question 18

If the Ricardian equivalence proposition is correct, then:

Accepted Answer

A)  deficits stimulate the economy in the short run. 
B)  deficits stimulate the economy in the medium run. 
C)  deficits have no effects on economic activity. 
D)  deficits harm future generations. 
E)  deficits reduce investment spending. 
A)  deficits stimulate the economy in the short run. 
B)  deficits stimulate the economy in the medium run. 
C)  deficits have no effects on economic activity. 
D)  deficits harm future generations. 
E)  deficits reduce investment spending.

Question 19

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

Accepted Answer

A)  the deficit is greater than the previous year's deficit. 
B)  future primary surpluses are less than the interest payment. 
C)  it causes an increase in private saving. 
D)  the deficit- to- GDP ratio is greater than the debt- to- GDP ratio. 
E)  it causes a fall in private saving. 
A)  the deficit is greater than the previous year's deficit. 
B)  future primary surpluses are less than the interest payment. 
C)  it causes an increase in private saving. 
D)  the deficit- to- GDP ratio is greater than the debt- to- GDP ratio. 
E)  it causes a fall in private saving.

Question 20

To reduce distortions in the economy, it is probably better to finance temporary large government spending with:

Accepted Answer

A)  taxes. 
B)  capital inflows. 
C)  exports. 
D)  national asset sales. 
E)  deficits. 
A)  taxes. 
B)  capital inflows. 
C)  exports. 
D)  national asset sales. 
E)  deficits.

Exam 23: Fiscal Policy: a Summing up

The difference between the official and correct measures of the deficit will be greater:

First, define and explain the cyclically adjusted deficit. Second, explain what effect a recession caused, for example, by a decrease in consumer confidence will have on the size of the cyclically adjusted deficit.

The Ricardian Equivalence proposition suggests that a tax increase that causes a budget surplus will:

Suppose the central bank increases the rate of growth of the money supply. What effect will this increase in money growth have on seignorage in: (1) the short run; and (2) the medium run? Explain.

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

The debt ratio is the ratio of the debt to:

Which of the following would increase the cyclically adjusted deficit?

The most extreme hyperinflation of the 20th century occurred in:

The debt- to- GDP ratio will tend to decline over time when:

The difference between the official and correct measures of the deficit will be greater:

Suppose the Ricardian Equivalence proposition holds (i.e., it is correct). What does this imply about the ability of fiscal policy to affect GDP? Explain.

The official measure of the deficit:

The official measure of the deficit is represented by which of the following expressions?

What is a haircut?

Which of the following is common to all hyperinflations?

The primary deficit is represented by which of the following?

In the medium run, a fiscal contraction that causes a decrease in the budget deficit:

If the Ricardian equivalence proposition is correct, then:

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

To reduce distortions in the economy, it is probably better to finance temporary large government spending with:

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Consumption and Investment

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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