Question 1

Why do economists think that the structural deficit is a good measure of the direction of fiscal policy?

Accepted Answer

A)  Because it adjusts over the business cycle, and reflects the fiscal stimulus of policy. 
B)  Because it changes when policy changes, rather than when the economy changes. 
C)  Because it changes when monetary policy changes, reflecting the interest rate cost of debt. 
D)  Because it adjusts automatically, rather than requiring specific legislation. 
A)  Because it adjusts over the business cycle, and reflects the fiscal stimulus of policy. 
B)  Because it changes when policy changes, rather than when the economy changes. 
C)  Because it changes when monetary policy changes, reflecting the interest rate cost of debt. 
D)  Because it adjusts automatically, rather than requiring specific legislation.

Question 2

What is the difference between the deficit and the debt?

Accepted Answer

The budget deficit is the difference ove

Question 3

Differentiate between "off-budget" deficit and the "on-budget" deficit.

Accepted Answer

Social Security expenditures and the pay

Question 4

A federal budget deficit places a genuine burden on future generations when the

Accepted Answer

A)  crowding-out effect is stronger than the crowding-in effect. 
B)  crowding-in effect is stronger than the crowding-out effect. 
C)  crowding-out and crowding-in effects work in opposite directions. 
D)  crowding-out and crowding-in effects operate in the same direction. 
A)  crowding-out effect is stronger than the crowding-in effect. 
B)  crowding-in effect is stronger than the crowding-out effect. 
C)  crowding-out and crowding-in effects work in opposite directions. 
D)  crowding-out and crowding-in effects operate in the same direction.

Question 5

A budget surplus exists when

Accepted Answer

A)  Tax receipts  government expenditures + transfers. 
C)  Government expenditures - transfers > tax receipts. 
D)  Government expenditures > transfers + tax receipts. 
A)  Tax receipts  government expenditures + transfers. 
C)  Government expenditures - transfers > tax receipts. 
D)  Government expenditures > transfers + tax receipts.

Question 6

The short-run effects of government's financial rescue program and fiscal stimulus package helped the economy increase aggregate demand curing the Great Recession.

Accepted Answer

A) True 
 B)False

Question 7

E.Carey Brown, an MIT economist, studied government deficits during the Great Depression and found that even though actual deficits were large, the structural deficit changed very little.Which of the following statements is consistent with this finding?

Accepted Answer

A)  Fiscal policy did not work during the Depression. 
B)  Fiscal policy made the Depression worse. 
C)  Fiscal policy was not tried during the Depression. 
D)  Fiscal policy improved the economy during the Depression. 
A)  Fiscal policy did not work during the Depression. 
B)  Fiscal policy made the Depression worse. 
C)  Fiscal policy was not tried during the Depression. 
D)  Fiscal policy improved the economy during the Depression.

Question 8

Suppose that the economy is currently at full employment.All other things being equal, if the government implements expansionary fiscal policy, then the appropriate monetary policy is

Accepted Answer

A)  no change from the current policy. 
B)  reduce the growth of the money supply. 
C)  constant growth of the money supply. 
D)  increase the growth of the money supply. 
A)  no change from the current policy. 
B)  reduce the growth of the money supply. 
C)  constant growth of the money supply. 
D)  increase the growth of the money supply.

Question 9

In actual practice, does the Fed monetize the debt?

Accepted Answer

A)  No, it did not do so even with large deficits in the 1980s and early 2000s. 
B)  No longer, although it monetized much of the deficit in the 1980s. 
C)  Yes, although it monetizes less now than in the 1980s. 
D)  Yes, it has monetized the deficit steadily since the early 1970s. 
A)  No, it did not do so even with large deficits in the 1980s and early 2000s. 
B)  No longer, although it monetized much of the deficit in the 1980s. 
C)  Yes, although it monetizes less now than in the 1980s. 
D)  Yes, it has monetized the deficit steadily since the early 1970s.

Question 10

Monetizing the debt is a way of turning debt into money and reducing the burden of the debt.

Accepted Answer

A) True 
 B)False

Question 11

Budget deficits are inflationary when

Accepted Answer

A)  the Federal Reserve contracts the money supply. 
B)  the economy has lots of slack and the aggregate supply curve is horizontal. 
C)  the economy is at full employment and the aggregate supply curve is vertical. 
D)  private citizens buy the bonds to finance the debt. 
A)  the Federal Reserve contracts the money supply. 
B)  the economy has lots of slack and the aggregate supply curve is horizontal. 
C)  the economy is at full employment and the aggregate supply curve is vertical. 
D)  private citizens buy the bonds to finance the debt.

Question 12

When will the difference between the actual deficit and the structural deficit be the largest?

Accepted Answer

A)  in an inflationary gap 
B)  at full employment 
C)  at potential real GDP 
D)  in a recession 
A)  in an inflationary gap 
B)  at full employment 
C)  at potential real GDP 
D)  in a recession

Question 13

Crowding in can be defined as

Accepted Answer

A)  an increase in the budget deficit increases demand so that investment increases. 
B)  tax incentives on investment encourage capital formation, an increase in aggregate supply. 
C)  consumption rises in a recovery, which increases demand for investment. 
D)  the budget deficit falls enough to lower interest rates to stimulate investment. 
A)  an increase in the budget deficit increases demand so that investment increases. 
B)  tax incentives on investment encourage capital formation, an increase in aggregate supply. 
C)  consumption rises in a recovery, which increases demand for investment. 
D)  the budget deficit falls enough to lower interest rates to stimulate investment.

Question 14

Figure 16-2
  
-Suppose that Figure 16-2 shows the effects of reducing the budget deficit by raising taxes.If authorities do not want real GDP to fall, monetary policy must

Accepted Answer

A)  become sufficiently more expansionary to restore the aggregate demand curve to D0D0. 
B)  contract aggregate demand to be consistent with deficit-reducing fiscal policy. 
C)  not lower interest rates and thwart the goal of a balanced budget. 
D)  become more contractionary to lower the interest rate and spur investment. 
A)  become sufficiently more expansionary to restore the aggregate demand curve to D0D0. 
B)  contract aggregate demand to be consistent with deficit-reducing fiscal policy. 
C)  not lower interest rates and thwart the goal of a balanced budget. 
D)  become more contractionary to lower the interest rate and spur investment.

Question 15

"Budget deficits are inflationary." The truth of this statement depends on

Accepted Answer

A)  aggregate demand in the economy. 
B)  the shape of the aggregate supply curve. 
C)  the size of the national debt. 
D)  existing debt as a percentage of GDP. 
A)  aggregate demand in the economy. 
B)  the shape of the aggregate supply curve. 
C)  the size of the national debt. 
D)  existing debt as a percentage of GDP.

Question 16

List three bogus arguments about the "burden of the debt," and point out the errors in each of the arguments.

Accepted Answer

Argument 1: The debt will burden future

Question 17

Compared to the size of GDP in 2010, the net national debt was approximately

Accepted Answer

A)  10% as large. 
B)  33% as large. 
C)  60% as large. 
D)  about twice as large. 
A)  10% as large. 
B)  33% as large. 
C)  60% as large. 
D)  about twice as large.

Question 18

The federal budget went $161 billion in fiscal year 2007 to $1 trillion in the next two to three years.What are the main factors that contributed to this increase?

Accepted Answer

Three main factors contributed to this i

Question 19

In the short run, the dominant effect of deficit reduction causes an

Accepted Answer

A)  outward shift of the aggregate supply curve. 
B)  inward shift of the aggregate supply curve. 
C)  outward shift of the aggregate demand curve. 
D)  inward shift of the aggregate demand curve. 
A)  outward shift of the aggregate supply curve. 
B)  inward shift of the aggregate supply curve. 
C)  outward shift of the aggregate demand curve. 
D)  inward shift of the aggregate demand curve.

Question 20

The central bank is said to monetize the deficit when it

Accepted Answer

A)  prints Federal Reserve notes to satisfy the increased demand for money. 
B)  sells government bonds from its own portfolio of government securities. 
C)  requires member banks to buy the bonds to finance the deficit. 
D)  purchases the bonds that the government issues. 
A)  prints Federal Reserve notes to satisfy the increased demand for money. 
B)  sells government bonds from its own portfolio of government securities. 
C)  requires member banks to buy the bonds to finance the deficit. 
D)  purchases the bonds that the government issues.

Exam 33: Budget Deficits in the Short and Long Run

Why do economists think that the structural deficit is a good measure of the direction of fiscal policy?

What is the difference between the deficit and the debt?

Differentiate between "off-budget" deficit and the "on-budget" deficit.

A federal budget deficit places a genuine burden on future generations when the

A budget surplus exists when

The short-run effects of government's financial rescue program and fiscal stimulus package helped the economy increase aggregate demand curing the Great Recession.

E.Carey Brown, an MIT economist, studied government deficits during the Great Depression and found that even though actual deficits were large, the structural deficit changed very little.Which of the following statements is consistent with this finding?

Suppose that the economy is currently at full employment.All other things being equal, if the government implements expansionary fiscal policy, then the appropriate monetary policy is

In actual practice, does the Fed monetize the debt?

Monetizing the debt is a way of turning debt into money and reducing the burden of the debt.

Budget deficits are inflationary when

When will the difference between the actual deficit and the structural deficit be the largest?

Crowding in can be defined as

Figure 16-2 -Suppose that Figure 16-2 shows the effects of reducing the budget deficit by raising taxes.If authorities do not want real GDP to fall, monetary policy must

"Budget deficits are inflationary." The truth of this statement depends on

List three bogus arguments about the "burden of the debt," and point out the errors in each of the arguments.

Compared to the size of GDP in 2010, the net national debt was approximately

The federal budget went $161 billion in fiscal year 2007 to $1 trillion in the next two to three years.What are the main factors that contributed to this increase?

In the short run, the dominant effect of deficit reduction causes an

The central bank is said to monetize the deficit when it

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate over Monetary and Fiscal Policy

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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