Question 1

The blame for failing to address the budget deficits of the 1980s and early 1990s

Accepted Answer

A)  is clearly the fault of the Republican administrations. 
B)  is clearly the fault of the Democratic Congresses. 
C)  is a political question rather than an economic question. 
D)  is an economic question rather than a political question. 
A)  is clearly the fault of the Republican administrations. 
B)  is clearly the fault of the Democratic Congresses. 
C)  is a political question rather than an economic question. 
D)  is an economic question rather than a political question.

Question 2

The Fed and the government are working against each other if, as the government cuts taxes to promote economic growth, the Fed

Accepted Answer

A)  sells government securities. 
B)  buys government securities. 
C)  lowers the discount rate. 
D)  lowers the prime rate. 
A)  sells government securities. 
B)  buys government securities. 
C)  lowers the discount rate. 
D)  lowers the prime rate.

Question 3

The main reason that the deficit grows in a recession is that

Accepted Answer

A)  the government reacts quickly and adjusts taxes to compensate. 
B)  monetary policy that targets interest rates causes the costs of borrowing to fall. 
C)  the deficit causes the recession, and reducing the deficit cures the recession. 
D)  many forms of taxes act as automatic stabilizers. 
A)  the government reacts quickly and adjusts taxes to compensate. 
B)  monetary policy that targets interest rates causes the costs of borrowing to fall. 
C)  the deficit causes the recession, and reducing the deficit cures the recession. 
D)  many forms of taxes act as automatic stabilizers.

Question 4

U.S. national debt at the end of the fiscal year 2018 was

Accepted Answer

A)  over $21 trillion. 
B)  over $31 trillion. 
C)  $45 trillion. 
D)  $50 trillion. 
A)  over $21 trillion. 
B)  over $31 trillion. 
C)  $45 trillion. 
D)  $50 trillion.

Question 5

The remarkable fact about the structural deficit after 1983 was that it was

Accepted Answer

A)  very high. 
B)  very small for a period of economic recovery. 
C)  very high during peacetime. 
D)  high during Republican administrations. 
A)  very high. 
B)  very small for a period of economic recovery. 
C)  very high during peacetime. 
D)  high during Republican administrations.

Question 6

Conventional budget accounting practices tend to overstate deficits in inflationary periods because they

Accepted Answer

A)  ignore the inflation tax. 
B)  confuse repayment of principal with real interest expenditures. 
C)  double count some expenditures. 
D)  understate real interest rates. 
A)  ignore the inflation tax. 
B)  confuse repayment of principal with real interest expenditures. 
C)  double count some expenditures. 
D)  understate real interest rates.

Question 7

"Crowding-out" refers to the process by which

Accepted Answer

A)  high consumption leads to low saving and investment. 
B)  the Fed prevents "runs" on banks. 
C)  Fed sales of bonds reduce the ability of corporations to buy bonds. 
D)  increased government spending raises interest rates, thus lowering investment spending. 
A)  high consumption leads to low saving and investment. 
B)  the Fed prevents "runs" on banks. 
C)  Fed sales of bonds reduce the ability of corporations to buy bonds. 
D)  increased government spending raises interest rates, thus lowering investment spending.

Question 8

If the national debt is owed to foreigners,

Accepted Answer

A)  the debt constitutes a burden to domestic citizens. 
B)  economic growth will necessarily be higher than if the debt were owed to domestic citizens. 
C)  paying off the debt will involve a transfer of resources within the country. 
D)  future interest payments on the debt are not a burden to the nation. 
A)  the debt constitutes a burden to domestic citizens. 
B)  economic growth will necessarily be higher than if the debt were owed to domestic citizens. 
C)  paying off the debt will involve a transfer of resources within the country. 
D)  future interest payments on the debt are not a burden to the nation.

Question 9

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 10

A serious burden of a budget deficit and an increase in the national debt comes on the supply side because large budget deficits

Accepted Answer

A)  discourage consumption and therefore lead to production cutbacks. 
B)  lead to lower interest rates and therefore to excessive optimism by consumers and businesspeople. 
C)  discourage investment and therefore may reduce the growth of the nation's capital stock. 
D)  discourage foreign investment and therefore limit employment opportunities. 
A)  discourage consumption and therefore lead to production cutbacks. 
B)  lead to lower interest rates and therefore to excessive optimism by consumers and businesspeople. 
C)  discourage investment and therefore may reduce the growth of the nation's capital stock. 
D)  discourage foreign investment and therefore limit employment opportunities.

Question 11

The structural deficit/surplus budget

Accepted Answer

A)  measures the federal budget deficit/surplus as if the economy were at full employment. 
B)  measures the federal budget deficit/surplus as if the economy were in recession. 
C)  measures the federal budget deficit/surplus as if the economy were suffering from high inflation. 
D)  is used when structural unemployment is at a peak. 
A)  measures the federal budget deficit/surplus as if the economy were at full employment. 
B)  measures the federal budget deficit/surplus as if the economy were in recession. 
C)  measures the federal budget deficit/surplus as if the economy were suffering from high inflation. 
D)  is used when structural unemployment is at a peak.

Question 12

Which of the following is expected to increase aggregate demand in the short run?

Accepted Answer

A)  Deficit budget 
B)  Surplus budget 
C)  Zero based budget 
D)  Balanced budget 
A)  Deficit budget 
B)  Surplus budget 
C)  Zero based budget 
D)  Balanced budget

Question 13

Crowding out can best be defined as

Accepted Answer

A)  private investment increases growth rates and decreases deficits. 
B)  restrictive monetary policy raises interest rates and decreases investment. 
C)  government deficits increase interest rates and decrease investment. 
D)  consumption spending increases interest rates and decreases investment. 
A)  private investment increases growth rates and decreases deficits. 
B)  restrictive monetary policy raises interest rates and decreases investment. 
C)  government deficits increase interest rates and decrease investment. 
D)  consumption spending increases interest rates and decreases investment.

Question 14

Higher interest rates and, therefore, a decrease in investment spending are most likely to be caused by which policy mix?

Accepted Answer

A)  Deficit reduction and expansionary monetary policy 
B)  Larger deficits and contractionary monetary policy 
C)  Larger deficits and expansionary monetary policy 
D)  Deficit reduction and contractionary monetary policy 
A)  Deficit reduction and expansionary monetary policy 
B)  Larger deficits and contractionary monetary policy 
C)  Larger deficits and expansionary monetary policy 
D)  Deficit reduction and contractionary monetary policy

Question 15

If the economy is in an inflationary gap and the government attempts to balance the budget, the effect will be to

Accepted Answer

A)  counteract inflation. 
B)  reduce the trade deficit. 
C)  continue inflationary pressures. 
D)  increase unemployment. 
A)  counteract inflation. 
B)  reduce the trade deficit. 
C)  continue inflationary pressures. 
D)  increase unemployment.

Question 16

Monetization of the deficit (or debt) means that

Accepted Answer

A)  the government uses monetary policy to control the economy rather than fiscal policy. 
B)  inflation accounting corrects for price increases. 
C)  the Fed buys newly issued debt and increases the money supply. 
D)  the amount of money in circulation is equal to the size of the debt. 
A)  the government uses monetary policy to control the economy rather than fiscal policy. 
B)  inflation accounting corrects for price increases. 
C)  the Fed buys newly issued debt and increases the money supply. 
D)  the amount of money in circulation is equal to the size of the debt.

Question 17

The structural deficit is determined by established expenditure-transfer policies and tax rates and is independent of the current level of GDP.

Accepted Answer

A) True 
 B)False

Question 18

No nation needs default on debts that call for repayment in its own currency.

Accepted Answer

A) True 
 B)False

Question 19

Many economists believe that if fiscal policy turns contractionary to reduce the deficit,

Accepted Answer

A)  monetary policy can turn expansionary to counteract the effects on aggregate demand. 
B)  monetary policy must be contractionary to reinforce the good effects of contractionary fiscal policy. 
C)  foreign investment in the United States must be encouraged. 
D)  taxes on the earnings from stock market gains should be increased. 
A)  monetary policy can turn expansionary to counteract the effects on aggregate demand. 
B)  monetary policy must be contractionary to reinforce the good effects of contractionary fiscal policy. 
C)  foreign investment in the United States must be encouraged. 
D)  taxes on the earnings from stock market gains should be increased.

Question 20

The crowding-out effect of higher interest rates can be avoided by

Accepted Answer

A)  expansionary monetary policy. 
B)  expansionary fiscal policy. 
C)  contractionary monetary policy. 
D)  decreasing taxes. 
A)  expansionary monetary policy. 
B)  expansionary fiscal policy. 
C)  contractionary monetary policy. 
D)  decreasing taxes.

Exam 32: Budget Deficits in the Short and Long Run

The blame for failing to address the budget deficits of the 1980s and early 1990s

The Fed and the government are working against each other if, as the government cuts taxes to promote economic growth, the Fed

The main reason that the deficit grows in a recession is that

U.S. national debt at the end of the fiscal year 2018 was

The remarkable fact about the structural deficit after 1983 was that it was

Conventional budget accounting practices tend to overstate deficits in inflationary periods because they

"Crowding-out" refers to the process by which

If the national debt is owed to foreigners,

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?

A serious burden of a budget deficit and an increase in the national debt comes on the supply side because large budget deficits

The structural deficit/surplus budget

Which of the following is expected to increase aggregate demand in the short run?

Crowding out can best be defined as

Higher interest rates and, therefore, a decrease in investment spending are most likely to be caused by which policy mix?

If the economy is in an inflationary gap and the government attempts to balance the budget, the effect will be to

Monetization of the deficit (or debt) means that

The structural deficit is determined by established expenditure-transfer policies and tax rates and is independent of the current level of GDP.

No nation needs default on debts that call for repayment in its own currency.

Many economists believe that if fiscal policy turns contractionary to reduce the deficit,

The crowding-out effect of higher interest rates can be avoided by

What Is Economics

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: an Initial Look

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

Contemporary Issues in the Us Economy

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