Deck 31: Deficits and Debt: the Austerity Debate

Question 1

In the long-run framework, budget surpluses:

A)should be run whenever output dips below potential output.
B)should never be run since they crowd out investment in the short run.
C)are better than budget deficits over the long run because unlike budget deficits, they increase saving and investment.
D)should be run on a permanent basis since they boost saving and investment and stimulate economic growth.

Answer 1

are better than budget deficits over the long run because unlike budget deficits, they increase saving and investment.

Question 2

Economists who focus on fiscal austerity focus on the short-run.

Answer 2

False

Question 3

A budget surplus is defined as:

A)a shortfall of revenues compared to expenditures.
B)a shortfall of expenditures compared to revenue.
C)accumulated deficits minus accumulated surpluses.
D)accumulated surpluses minus accumulated deficits.

Answer 3

a shortfall of expenditures compared to revenue.

Question 4

A country that is running a budget surplus will not be in debt.

Question 5

The real deficit is the nominal deficit adjusted for inflation's effect on existing debt.

Question 6

A government budget deficit occurs when government revenues exceed government expenditures.

Question 7

In the long-run framework, deficits reduce:

A)investment.
B)government consumption.
C)taxes.
D)subsidies.

Question 8

Evidence shows the United States can continue its expansionary fiscal policies without causing a new financial crisis.

Question 9

If Japan's debt level is much higher than that of the United States, the United States has more flexibility to run deficits.

Question 10

The larger the debt and the inflation rate, the less debt will be eliminated by inflation.

Question 11

Budget deficits contribute to higher debt.

Question 12

Countries with larger debts in terms of absolute value are worse off than countries with smaller debts.

Question 13

Much of the U.S.debt is held internally.

Question 14

Economists believe that an increase in equilibrium income can eliminate a cyclical deficit but cannot eliminate a structural deficit.

Question 15

Over the past five years, most countries' debt-to-GDP ratios have risen as a result of the global recession.

Question 16

In several years, bondholders may lose confidence in the United States willingness to pay back funds.

Question 17

Deficits may be desirable in the short run if they:

A)help to stabilize the economy when the economy falls below potential output.
B)increase savings necessary for future investment and growth.
C)increase savings necessary for future consumption and demand.
D)help to stabilize the economy when the economy is above potential output.

Question 18

In the short-run framework, budget deficits should:

A)never be run since they slow economic growth over the long run.
B)never be run since they crowd out investment in the short run.
C)be run on a temporary basis whenever the economy is below potential output.
D)be run on a permanent basis since they can always be financed by printing money.

Question 19

The portion of the budget deficit or surplus that would exist even if the economy were at its potential income is called the cyclical deficit or cyclical surplus.

Question 20

A budget deficit is defined as:

A)a shortfall of revenues compared to expenditures.
B)a shortfall of expenditures compared to revenue.
C)accumulated deficits minus accumulated surpluses.
D)accumulated surpluses minus accumulated deficits.

Question 21

The budget deficit or surplus is:

A)well defined and straightforward to measure.
B)well defined but frequently distorted by creative but improper accounting practices.
C)difficult to measure and can be defined legitimately in several ways.
D)so arbitrarily defined that it is meaningless.

Question 22

When the economy is operating close to potential, the budget deficit experienced is:

A)primarily cyclical.
B)primarily structural.
C)neither structural nor cyclical.
D)about evenly split between structural and cyclical.

Question 23

The structural deficit:

A)rises as the economy expands and falls when it contracts.
B)falls as the economy expands and rises when it contracts.
C)changes as actual income changes regardless of potential income.
D)does not change when income changes, but changes only when potential income changes.

Question 24

If taxes and government expenditures were constant and did not vary with income, then:

A)cyclical deficits would increase.
B)cyclical deficits would not exist.
C)structural deficits would increase.
D)structural deficits would not exist.

Question 25

If an economy operates below potential income, the actual deficit is:

A)smaller than the structural deficit.
B)larger than the structural deficit.
C)the same as the structural deficit.
D)comparable to the structural deficit.

Question 26

The cyclical deficit:

A)is not affected by changes in actual income or potential income.
B)rises as the economy expands and falls as the economy contracts.
C)is the deficit that exists if the economy is at potential income.
D)rises as the economy moves below potential output.

Question 27

A policy of fiscal austerity could have difficulty lowering the debt-to-GDP ratio because it might:

A)lower potential output and government spending.
B)raise both GDP and government revenue.
C)lower both GDP growth and government revenue.
D)raise potential output and government spending.

Question 28

Economists who focus on the need for fiscal austerity tend to focus on

A)the long run
B)the short run
C)both the short run and the long run
D)neither the short run or the long run

Question 29

The budget deficit or surplus is:

A)easy to calculate since there is only one valid method for computing it.
B)hard to calculate even though there is only one valid method for computing it.
C)hard to calculate since economists disagree on how it should be computed.
D)easy to calculate since economists agree on how it should be computed.

Question 30

During World War II, the economic boom that raised U.S.equilibrium income above potential income:

A)increased the structural deficit.
B)eliminated any structural deficit.
C)increased the cyclical deficit.
D)eliminated any cyclical deficit.

Question 31

A government can finance its budget deficit by doing all of the following except:

A)buying bonds.
B)borrowing from its central bank.
C)selling bonds.
D)printing money.

Question 32

If income falls below its potential and the income tax rate is reduced, this will:

A)raise both the cyclical and structural deficits.
B)raise the cyclical deficit but reduce the structural deficit.
C)reduce the cyclical deficit but raise the structural deficit.
D)reduce both the cyclical and structural deficits.

Question 33

Deficits and surpluses are best viewed as:

A)comprehensive measures of government's budget.
B)a summary measure of a nation's fiscal policy.
C)a summary measure of the financial health of the economy.
D)a summary measure of a nation's monetary policy.

Question 34

A cyclical deficit is the portion of the deficit that exists when:

A)the economy is at potential income.
B)the economy is below potential income.
C)inflation is not fully anticipated.
D)inflation is fully anticipated.

Question 35

Compared to the predictions of the standard AS/AD model, the structural stagnation model implies that the:

A)structural deficit is higher.
B)cyclical deficit is higher.
C)frictional deficit is lower.
D)potential deficit is lower.

Question 36

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

A)zero.
B)$1 billion.
C)$10 billion.
D)$20 billion.

Question 37

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income.If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the cyclical deficit:

A)is zero.
B)is between zero and $4 billion.
C)is $4 billion.
D)cannot be determined from the given information.

Question 38

If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

A)zero.
B)$1 billion.
C)$10 billion.
D)$20 billion.

Question 39

If a cyclical surplus exists, the economy must be:

A)at potential income.
B)above potential income.
C)below potential income.
D)experiencing deflation.

Question 40

When the government runs a deficit, it will:

A)buy bonds to finance the deficit.
B)sell bonds to finance the deficit.
C)reduce the money supply to finance the deficit.
D)raise taxes immediately.

Question 41

The nominal deficit depends primarily on:

A)government's expenditures and receipts.
B)the rate of inflation.
C)the difference between potential and actual output.
D)the debt.

Question 42

The cyclical deficit is $400 billion, potential output is $9 trillion and the tax rate is 16 percent.With this information, we can infer that the actual output of this economy is:

A)$6 trillion.
B)$11.5 trillion.
C)$6.5 trillion.
D)$9 trillion.

Question 43

In order to calculate the real deficit, economists need to know the:

A)nominal deficit and the rate of inflation.
B)rate of inflation and the debt.
C)rate of inflation, the debt, and the nominal deficit.
D)rate of inflation, the debt, and the real interest rate.

Question 44

Suppose that the economy has a structural deficit of $200 billion and is also running a budget deficit.It follows that:

A)there is no cyclical deficit or surplus.
B)there is a cyclical surplus.
C)there is a cyclical deficit.
D)the cyclical deficit or surplus cannot be determined without more information.

Question 45

If an economy is $100 billion below potential, the tax rate is 20 percent, and the deficit is $180 billion, the structural deficit is:

A)$20 billion.
B)$160 billion.
C)$180 billion.
D)$200 billion.

Question 46

Say the economy is at its potential income at $8 trillion and the deficit is $200 billion.The structural deficit:

A)is $200 billion.
B)could be less than $200 billion.
C)could be more than $200 billion.
D)cannot be determined from the given information.

Question 47

A decrease the nominal deficit can be caused by an increase in:

A)taxes
B)government expenditures
C)interest rates
D)the debt

Question 48

Suppose that the economy has a structural surplus of $100 billion and is operating above potential output.From this we can infer that the budget as a whole:

A)is in deficit.
B)is balanced.
C)is in surplus.
D)could be in deficit or surplus depending on the size of the cyclical deficit.

Question 49

Suppose that the economy has a structural deficit of $200 billion but is running a budget surplus.It follows that:

A)there is no cyclical deficit or surplus.
B)there is a cyclical surplus.
C)there is a cyclical deficit.
D)the cyclical deficit cannot be determined without more information.

Question 50

The real deficit is the nominal deficit adjusted for changes in:

A)interest rates.
B)potential output.
C)output.
D)the general price level.

Question 51

Suppose that the economy has a structural deficit of $100 billion and a budget deficit of $100 billion.It follows that output:

A)must equal potential output.
B)must be above potential output.
C)must be below its potential output.
D)could be at, above, or below potential output.

Question 52

The real deficit depends on the:

A)level of government expenditures and receipts only.
B)rate of inflation only.
C)nominal deficit, the rate of inflation, and the government debt.
D)rate of interest only.

Question 53

In the formula to calculate the real deficit, which of the following increases the real deficit?

A)A smaller nominal deficit
B)A lower interest rate
C)A larger debt
D)A lower inflation rate

Question 54

If an economy is operating at potential output:

A)any surplus would be a cyclical surplus.
B)any surplus would be a structural surplus.
C)a budget surplus is impossible.
D)the budget must be in surplus.

Question 55

Suppose that the economy has a structural deficit of $200 billion and is operating above potential output.From this we can infer that the budget as a whole:

A)is in deficit.
B)is balanced.
C)is in surplus.
D)could be in deficit, in surplus, or balanced.

Question 56

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income.If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the structural deficit:

A)is zero.
B)is between zero and $4 billion.
C)is $4 billion.
D)cannot be determined from the given information.

Question 57

Policymakers generally are:

A)more concerned about structural deficits than cyclical deficits.
B)equally concerned about structural and cyclical deficits.
C)more concerned about cyclical deficits than structural deficits.
D)not concerned about structural or cyclical deficits.

Question 58

Suppose that the economy has a structural deficit of $200 billion and a budget deficit of $100 billion.It follows that output:

A)must equal potential output.
B)must be above potential output.
C)must be below its potential output.
D)could be at, above, or below potential output.

Question 59

In the formula to calculate the real deficit, which of the following decreases the real deficit?

A)A larger nominal deficit
B)Aa higher interest rate
C)A larger debt
D)A lower inflation rate

Question 60

The cyclical surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent.With this information, we can infer that the actual output of this economy is:

A)$13 trillion.
B)$13.5 trillion.
C)$6 trillion.
D)$6.5 trillion.

Question 61

All other things equal, the real surplus:

A)falls as inflation increases.
B)is not affected by inflation.
C)rises as inflation increases.
D)may rise or fall as inflation increases depending on the level of debt.

Question 62

If the nominal deficit is $200 billion, the real deficit is $150 billion, and total debt is $2 trillion, then inflation is:

A)1 percent.
B)2.5 percent.
C)4 percent.
D)5 percent.

Question 63

The real deficit is $180 billion; inflation is 4 percent; total debt is $4.5 trillion.The nominal deficit is:

A)zero.
B)$1 billion.
C)$180 billion.
D)$360 billion.

Question 64

Holding the nominal deficit, nominal interest rate, and total debt constant, an increase in the inflation rate will:

A)not affect the real deficit.
B)raise the real deficit.
C)lower the real deficit.
D)either raise or lower the real deficit depending on the real interest rate.

Question 65

If the real deficit is $200 billion, the inflation rate is 5 percent, and the debt is $3 trillion, then the nominal deficit is:

A)$100 billion.
B)$250 billion.
C)$300 billion.
D)$350 billion.

Question 66

If the real deficit is $100 billion, the inflation rate is 10 percent, and the nominal deficit is $400 billion, then the debt is:

A)$1 trillion.
B)$2 trillion.
C)$3 trillion.
D)$4 trillion.

Question 67

If the real deficit is $200 billion, the inflation rate is 2.5 percent, and total debt is $2 trillion, then the nominal deficit is:

A)$100 billion.
B)$250 billion.
C)$300 billion.
D)$350 billion.

Question 68

If the real deficit is $100 billion, the inflation rate is 7.5 percent, and the nominal deficit is $400 billion, then total debt is:

A)$1 trillion.
B)$2 trillion.
C)$3 trillion.
D)$4 trillion.

Question 69

If the nominal deficit is $200 billion, the real deficit is $180 billion, and total debt is $2 trillion, then inflation is:

A)1 percent.
B)2.5 percent.
C)4 percent.
D)5 percent.

Question 70

If government has no debt initially but then has annual revenues of $1.5 billion for 10 years and annual expenditures of $1.6 billion for 10 years, then the government has a:

A)deficit of $100 million per year and a debt of $1 billion.
B)surplus of $100 million per year and a debt of $1 billion.
C)deficit of $100 million and a debt of $1 billion per year.
D)surplus of $100 million and a debt of $1 billion per year.

Question 71

If the national debt increases in any given year, it follows that the government:

A)sold bonds in that year to finance a budget surplus.
B)bought bonds in that year to finance a budget surplus.
C)sold bonds in that year to finance a budget deficit.
D)bought bonds in that year to finance a budget deficit.

Question 72

If the U.S.inflation rate increases unexpectedly and government revenues, expenditures, and nominal interest rates remain unchanged:

A)both the U.S real and nominal budget deficits increases.
B)only the U.S.real budget deficit increases.
C)only the U.S.real budget deficit decreases.
D)both the U.S.real and nominal budget deficits decreases.

Question 73

Bond holders:

A)lose when actual inflation equals expected inflation.
B)gain when actual inflation is more than was expected.
C)do not lose when the expected inflation built into the nominal interest rate is correct.
D)do not lose when the expected inflation built into the nominal interest rate is lower than actual inflation.

Question 74

If government has no debt initially but then annual revenues are $8 billion for 10 years while annual expenditures are $11 billion for 10 years, then the government has a:

A)deficit of $3 billion per year and a debt of $30 billion.
B)surplus of $3 billion per year and a debt of $30 billion.
C)deficit of $30 billion and a debt of $3 billion per year.
D)surplus of $30 billion and a debt of $3 billion per year.

Question 75

If inflation is correctly anticipated, those who buy government bonds will:

A)suffer losses regardless of inflation because interest paid on government bonds is set by Congress.
B)not suffer losses because inflation does not affect the purchasing power.
C)suffer losses because they will be compensated by lower interest payments.
D)not suffer losses because they will be compensated by higher interest payments.

Question 76

Government debt is defined as:

A)a shortfall of incoming revenue under outgoing payment.
B)a shortfall of outgoing payments under incoming revenue.
C)accumulated deficits minus accumulated surpluses.
D)accumulated deficits plus accumulated surpluses.

Question 77

An unanticipated increase in the inflation rate will most likely:

A)either increase or decrease the real value of the national debt, depending on the effect of inflation on capital gains and losses.
B)increase the real value of the national debt.
C)transfer real wealth from bondholders to the government.
D)have no effect on the real value of the national debt.

Question 78

Which of the following statements gives the correct definition of the real deficit?

A)Real deficit = Nominal deficit + (inflation × total debt)
B)Real deficit = Nominal deficit + (total debt/inflation)
C)Real deficit = Nominal deficit - (total debt/inflation)
D)Real deficit = Nominal deficit -- (inflation × total debt)

Question 79

If the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is:

A)-$20 billion (a surplus).
B)-$100 billion (a surplus).
C)$20 billion.
D)$100 billion.

Question 80

If the nominal deficit is $300 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is equal to:

A)-$20 billion.
B)-$100 billion.
C)$20 billion.
D)$100 billion.