Deck 16: The Monetary System

Question 1

If the government debt, D, equals $5 trillion, the nominal interest rate is 7 percent, and the real interest rate is 3 percent, then nominal budget deficit overstates the real deficit by trillion.

A)$0.35
B)$0.20
C)$0.15
D)$0.07

Answer 1

B

Question 2

Historically, the primary cause of increases in government debt is:

A)printing too much money.
B)cutting taxes.
C)increasing interest rates.
D)financing wars.

Answer 2

D

Question 3

Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equals $4 trillion. By how much is the government budget deficit overstated as a result of inflation?

A)$0.12 trillion
B)$0.32 trillion
C)$0.44 trillion
D)$0.80 trillion

Answer 3

B

Question 4

The large increase in U.S. government debt between 1980 and 1995 was unusual because it occurred:

A)during peacetime.
B)during an extended recessionary period.
C)without increased government spending.
D)without tax cuts.

Question 5

If government debt is not changing, then:

A)the economy is at long-run equilibrium.
B)the government's budget must be balanced.
C)GDP must equal the natural rate of output.
D)capital per worker is constant.

Question 6

When the federal government incurs additional debt to acquire an asset, under current budgeting procedures the deficit
, while under capital budgeting procedures the deficit .

A)does not change; increases
B)increases; does not change
C)does not change; decreases
D)decreases; does not change

Question 7

If capital budgeting procedures were employed, then a budget deficit would be measured as:

A)the sum of government debt.
B)the change in government debt.
C)the change in government debt minus the change in government capital assets.
D)the change in government capital assets.

Question 8

Relative to the size of the GDP, U.S. federal government debt was at its maximum:

A)at the end of the Revolutionary War.
B)at the end of the Civil War.
C)at the end of World War II.
D)following the 9/11 terrorist attacks in 2001.

Question 9

The amount by which government spending exceeds government revenues is called the , and the accumulation of past government borrowing is called the .

A)deficit; debt debt;
B)deficit devaluation;
C)deflation deflation;
D)devaluation

Question 10

In a time of inflation when the real (i.e., deflated) value of the government debt is constant, then the conventionally:

A)reported government budget will show a deficit equal to the inflation rate times the outstanding debt.
B)reported government budget will show a deficit equal to less than the inflation rate times the outstanding
C)reported government budget will be balanced.
D)measured government budget will show a surplus equal to the inflation rate times the outstanding debt.

Question 11

Compared to the size of government debt as a percentage of GDP in other major industrial countries, the federal government of the United States:

A)is one of the most heavily indebted governments.
B)has accumulated a relatively small debt.
C)has debt ranked about midway between the most and least heavily indebted governments.
D)is one of the least indebted governments.

Question 12

In a time of inflation when the government budget is balanced in the conventional sense, the real (i.e., deflated) value of the government debt is:

A)growing at the rate of inflation.
B)growing, but at a rate less than the rate of inflation.
C)constant.
D)decreasing at the rate of inflation.

Question 13

Government debt equals the:

A)difference between current government purchases and taxes.
B)difference between saving and investment.
C)sum of past budget deficits and surpluses.
D)M1 money supply.

Question 14

Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except:

A)decreases in government spending.
B)increases in GDP.
C)decreases in tax revenues.
D)decreases in transfer payments.

Question 15

If the debt of the U.S. federal government in 2008 was divided equally among the people in the United States, then the debt per person would equal approximately:

A)$1,900.
B)$19,000.
C)$91,000.
D)$190,000.

Question 16

The factors most responsible for forecasts of the U.S. government debt spiraling out of control in the next half century are the projected:

A)slowdowns in the rates of technological change and human capital growth.
B)decrease in high-skilled domestic workers and the increase in immigration of low-skilled workers into the United States.
C)aging of the U.S. population and rising health care costs.
D)increase in international competition and the outsourcing of U.S. jobs.

Question 17

The government budget deficit is the , and government debt is the .

A)amount by which imports exceed exports; amount by which government spending exceeds government revenue
B)amount by which government spending exceeds government revenue; amount by which imports exceed exports
C)amount by which government spending exceeds government revenue; accumulation of past government borrowing
D)accumulation of past government borrowing; amount by which government spending exceeds government revenue

Question 18

An increase in the elderly population of a country affects fiscal policy most directly because:

A)the elderly generally are not required to pay taxes.
B)governments provide pensions and health care for the elderly.
C)the elderly favor high interest rates on their savings.
D)governments spend more on education as the proportion of the elderly increases.

Question 19

Current measures of the U.S. federal government's budget deficit account for all of the following except:

A)government expenditures.
B)government revenues.
C)changes in government indebtedness.
D)changes in government capital assets.

Question 20

When a government spends more than it collects in taxes, it runs a:

A)trade deficit.
B)trade surplus.
C)budget surplus.
D)budget deficit.

Question 21

The cyclically adjusted budget deficit:

A)adjusts the deficit for inflation.
B)estimates what the deficit would be if the economy were operating at the natural level of output.
C)accounts for assets as well as liabilities.
D)measures the impact of fiscal policy on the lifetime incomes of individuals of different ages.

Question 22

According to the traditional view, if taxes are cut without a cut in government spending, then in the United States this situation will lead to net indebtedness on the part of the United States to foreign countries and net exports.

A)more; more
B)more; fewer
C)less; fewer
D)less; more

Question 23

According to the traditional view, if taxes are cut without cutting government spending, then the long-run effects will be
Capital and consumption.

A)higher; higher
B)lower; lower
C)higher; lower
D)lower; higher

Question 24

An estimate of what government spending and tax revenue would be if the economy were operating at its natural level of output and employment is called the budget.

A)cyclically adjusted
B)inflation adjusted
C)capital asset
D)generational accounting

Question 25

According to the traditional viewpoint, a tax cut without a cut in government spending:

A)raises consumption in both the short run and the long run.
B)lowers consumption in both the short run and the long run.
C)raises consumption in the short run but lowers it in the long run.
D)lowers consumption in the short run but raises it in the long run.

Question 26

Capital budgeting is a procedure that:

A)adjusts the deficit for inflation.
B)estimates what the deficit would be if the economy were operating at the natural level of output.
C)accounts for assets as well as liabilities.
D)measures the impact of fiscal policy on the lifetime incomes of individuals of different ages.
Multiple Choice

Question 27

Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to:

A)remain balanced.
B)be in deficit.
C)be in surplus.
D)be in either deficit or surplus, depending on the severity of the recession.

Question 28

According to the traditional view, if taxes are cut without cutting government spending, then the short-run effects will be:

A)higher output and lower unemployment.
B)higher output and higher unemployment.
C)no change in output or unemployment.
D)no change in output and higher unemployment.

Question 29

Each of the following changes would allow the measured budget deficit to provide a truer picture of fiscal policy except:

A)correcting for the effects of inflation.
B)offsetting changes in government liabilities with changes in government assets.
C)excluding some liabilities altogether.
D)correcting for the effects of the business cycle.

Question 30

According to the traditional viewpoint, a tax cut without a cut in government spending:

A)stimulates consumer spending and reduces national saving.
B)stimulates consumer spending and reduces private saving.
C)has no effect on consumer spending but reduces national saving.
D)has no effect on consumer spending but reduces private saving.

Question 31

If the preferred bank stock acquired by the U.S. government through the TARP program is valued using a capital budgeting approach, then the government budget deficit in the year in which the stocks is acquired will be than if a current budget approach were employed.

A)larger
B)smaller
C)no different
D)more cyclical

Question 32

One item that is considered part of the federal debt is:

A)Treasury bills.
B)future Social Security benefits.
C)student loans, which may go into default.
D)potential liabilities of savings and loan associations.

Question 33

According to the traditional view (as in the Mundell-Fleming model), if taxes are cut without cutting government spending, then the short-run effects are a(n) of the dollar and a(n) in net exports.

A)appreciation; increase
B)appreciation; decrease
C)depreciation; increase
D)depreciation; decrease

Question 34

The international impacts of a debt-financed tax cut, according to the traditional view, are a(n) in net exports and a domestic currency .

A)increase; appreciation
B)increase; depreciation
C)decrease; depreciation
D)decrease; appreciation

Question 35

According to the traditional view, if taxes are cut without cutting government spending, then the international effect initially will be a capital and a trade .

A)inflow; deficit
B)inflow; surplus
C)outflow; deficit
D)outflow; surplus

Question 36

Cyclically adjusted budgets are useful because they:

A)systematically account for changes in government assets and liabilities.
B)reflect policy changes, but not current economic conditions.
C)account for tax burdens on different generations of taxpayers.
D)correctly account for the impact of inflation on government indebtedness.

Question 37

The debt of the U.S. government is underreported in the view of many economists because all of the following liabilities are excluded except:

A)future pensions of government employees.
B)debt owed to foreigners.
C)future Social Security benefits.
D)government guarantees of student loans.

Question 38

Measuring the size of government debt is complicated by all of the following factors except:

A)inflation.
B)uncounted liabilities.
C)capital assets of the government.
D)failure of the Office of Management and Budget to disclose figures on capital expenditures and credit programs.

Question 39

Under capital budgeting, all of the following transactions would affect the federal budget deficit except the federal government's:

A)sending a check to a welfare recipient.
B)sending a check to the state of Massachusetts.
C)selling a highway to the state of New York and using the proceeds to retire federal debt.
D)selling an office building.

Question 40

The amount the government would owe if a borrower were to default on a government-guaranteed loan is an example of:

A)capital budgeting.
B)a contingent liability.
C)a cyclically adjusted liability.
D)Ricardian equivalence.

Question 41

Inflation-indexed government bonds have all of the following benefits except:

A)eliminating inflation.
B)reducing the government's incentive to produce surprise inflation.
C)encouraging financial innovation.
D)eliminating inflation risk.

Question 42

If an individual should subtract the present value of future tax obligations due to the government deficit from his or her disposable income, this situation suggests that, in aggregate analysis, the government deficit should be subtracted from disposable income. That is, instead of C = a + b(Y - T), we should use:
C = a + b(Y - T - (G - T)), or
C = a + b(Y - G).
a. Using this consumption function and the further relations:
I = I
G = G T = T
Y = C + I + G
write the equilibrium equation determining Y as a function of a, I, G, and T.
b. If b equals 0.5, what are the numerical values of the multipliers for I, G, and T, respectively?

Question 43

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern but are not altruistically linked:

A)both the young and the old will consume more.
B)there will be a net increase in overall consumption.
C)there will be a net decrease in overall consumption.
D).there will be no change in overall consumption.

Question 44

High levels of government debt that raise investors' fear of a government default on debt will result in capital
And a(n) of the country's exchange rate.

A)outflows; depreciation
B)outflows; appreciation
C)inflows; depreciation
D)inflows; appreciation

Question 45

Using the model of aggregate demand-aggregate supply to illustrate the traditional view, graphically compare the short-run and long-run impact of a debt-financed tax cut on:
a. output, and b. prices.

Question 46

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern and are altruistically linked:

A)both the young and the old will consume more.
B)there will be a net increase in overall consumption.
C)there will be a net decrease in overall consumption.
D)there will be no change in overall consumption.

Question 47

Graphically illustrate the traditional view of the long-run impacts of a debt-financed tax cut on:
a. saving, investment, and real interest rate using the classical model (Chapter 3), and b. steady-state capital per worker and output per worker using the Solow growth model.

Question 48

A measure of the expected rate of inflation can be found by the:

A)yield on index bonds plus the yield on nominal bonds.
B)yield on index bonds minus the yield on nominal bonds.
C)observed rate of inflation minus the yield on real bonds.
D)observed rate of inflation minus the yield on nominal bonds.

Question 49

Compare the traditional view versus the view of Ricardian equivalence of the effects of a debt-financed tax cut on:
a. national saving;
b. current consumption;
c. the real interest rate.

Question 50

Indexed bonds produce all of the following benefits except:

A)less inflation risk.
B)more financial innovation.
C)better government incentives.
D)lower rates of inflation.

Question 51

Graphically illustrate the traditional view of the short-run impacts of a debt-financed tax cut on:
a. interest rates and output in a closed economy in the short-run using the IS-LM model, and
b. exchange rates and output in a small open economy with a flexible exchange rate in the short run using the Mundell-Fleming model.

Question 52

According to the traditional view (as in the IS-LM model), if taxes are cut without cutting government spending, then in the short run interest rates will and investment will .

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increas