Deck 17: Federal Deficits Surpluses and the National Debt

Question 1

Currently, the national debt is approximately:

A) 10 percent of GDP.
B) 60 percent of GDP.
C) 105 percent of GDP.
D) 120 percent of GDP.

Answer 1

C

Question 2

Exhibit 17-1: Global Comparison of Government Surpluses and Deficits as a Percentage of GDP, 2016 $$\begin{array} { | l c | } \hline \text { Country } & \text { Surplus } ( + ) \text { or Deficit } ( - ) \text { as a percent of GDP } \\\text { Canada } & - 1.10 \\\text { Iceland } & 12.57 \\\text { Latvia } & 0.06 \\\text { Norway } & 3.99 \\\text { Spain } & - 4.51 \\\text { United States } & - 4.94 \\\hline\end{array}$$ Given the information in Exhibit 17-1, which of the countries shown was closest to balancing its budget?

A) Iceland
B) Latvia
C) Norway
D) United States

Answer 2

Latvia

Question 3

It is important to distinguish between the privately held portion of the national debt and the portion held by government agencies and the Federal Reserve System because:

A) the government will not have to repay the privately held debt.
B) only the privately held debt creates a net interest liability for the federal government.
C) the privately held debt does not create a net interest liability for the federal government.
D) taxes will have to be raised in order to pay the interest on the debt held by the Federal Reserve system.

Answer 3

B

Question 4

If the national debt rises to the debt ceiling and there is currently a budget ________, the Congress and the President must agree to ________ the debt ceiling or else the federal government will have insufficient funds to pay its bills and will be forced to shut down.

A) surplus, lower
B) deficit, raise
C) surplus, raise
D) deficit, lower

Question 5

If the federal government were to run a budget deficit, this would:

A) increase the size of the national debt.
B) reduce the size of the national debt.
C) leave the size of the national debt unchanged.
D) increase the national debt only if the government also expands the supply of money.

Question 6

The national debt is unlikely to cause national bankruptcy because the:

A) national debt can be refinanced by issuing new bonds.
B) interest on the public debt equals GDP.
C) national debt cannot be shifted to future generations for repayment.
D) federal government cannot refinance the outstanding national debt.

Question 7

When the U. S. federal government runs a budget deficit, it borrows money by selling:

A) Treasury bills, notes, and bonds.
B) publicly owned land.
C) its gold reserves.
D) financial assets located in foreign banks.

Question 8

How does inclusion of the current revenues and expenditures of the Social Security trust fund into the budget calculation affect the reported budget deficit of the federal government when the trust fund experiences a surplus ?

A) It increases the reported deficit.
B) It reduces the reported deficit.
C) It exerts no effect on the reported deficit.
D) It increases the deficit during an economic boom but reduces it during a recession.

Question 9

If the federal government runs a budget deficit, but the budget deficit as a percent of GDP is less than the growth rate of real output, the:

A) national debt will decrease as a share of GDP.
B) national debt will remain a constant share of GDP.
C) national debt will increase as a share of GDP.
D) size of the national debt (in dollar value) will decline.

Question 10

Which of the following portions of the national debt impose a net interest burden on the federal government?

A) treasury bonds held by government agencies
B) treasury bonds held by private investors
C) treasury bonds held by the Federal Reserve system
D) treasury bonds held in the Social Security Trust Fund

Question 11

If the fiscal year begins without a budget and Congress fails to pass continuing resolution, then:

A) the president has the right to raise the debt ceiling.
B) federal agencies operate on the basis of the previous year's budget.
C) the interest rate paid on the national debt automatically increases.
D) the federal government shuts down.

Question 12

What is the difference between the federal budget deficit and the national debt?

A) The budget deficit is the amount by which expenditures exceed revenues in a particular year, while the national debt is the cumulative effect of all past budget deficits and surpluses.
B) The budget deficit is the cumulative effect of all prior national debts.
C) The national debt includes all outstanding bonds, while the budget deficit excludes bonds held by government agencies.
D) There is no difference between the budget deficit and the national debt.

Question 13

In recent years, net interest on the national debt paid by the federal government as a percentage of GDP is equal to approximately:

A) 1 to 3 percent.
B) 5 to 9 percent.
C) 10 to 14 percent.
D) 15 to 19 percent.

Question 14

If the federal government runs a budget _______, then the national debt becomes __________.

A) surplus, larger
B) deficit, smaller
C) surplus, smaller
D) deficit, the size of the deficit

Question 15

The federal budget process begins when federal agencies submit their budget requests to the:

A) Treasury Department.
B) Council of Economic Advisors (CEA).
C) Office of Management and Budget (OMB).
D) Congressional Budget Office (CBO).

Question 16

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:

A) balanced budget amendment.
B) deficit reduction plan.
C) conference resolution.
D) continuing resolution.

Question 17

Exhibit 17-1: Global Comparison of Government Surpluses and Deficits as a Percentage of GDP, 2016 $$\begin{array} { | l c | } \hline \text { Country } & \text { Surplus } ( + ) \text { or Deficit } ( - ) \text { as a percent of GDP } \\\text { Canada } & - 1.10 \\\text { Iceland } & 12.57 \\\text { Latvia } & 0.06 \\\text { Norway } & 3.99 \\\text { Spain } & - 4.51 \\\text { United States } & - 4.94 \\\hline\end{array}$$ Given the information in Exhibit 17-1, which of the following statements is correct?

A) Canada was the closest of the countries shown to balancing its budget.
B) Norway likely had to sell government securities to finance its overspending.
C) Iceland experienced the largest deficit of the countries shown.
D) The national debts of Canada, Spain and United States increased in 2016.

Question 18

The national debt is:

A) the difference between a nation's exports and imports of goods and services.
B) the sum of the personal debt of all citizens in the United States.
C) the cumulative effect of all past budget deficits and surpluses of the federal government.
D) equal to the current size of the budget deficit.

Question 19

The idea that a large national debt is "mortgaging the future of our children and grandchildren" is misleading because:

A) it is the Federal Reserve that will be responsible for making interest payments on the debt.
B) future generations will have to bear the opportunity costs of the resources that are used today.
C) future generations will not be liable for the interest obligations of the national debt.
D) future generations will inherit the interest income as well as the interest obligations.

Question 20

Which of the following statements is true ?

A) The national debt is the current year's amount by which the government is spending more than it collects in taxes.
B) Deficits are financed by the government issuing for sale more government securities.
C) The debt ceiling refers to the amount of debt at which the government is officially declared as being bankrupt.
D) Internal national debt is the portion of the national debt owed to foreigners.

Question 21

"Crowding out" is the theory that an increase in our federal government's budget deficit will likely:

A) decrease the national debt.
B) decrease interest rates.
C) decrease borrowing by households and businesses
D) increase the impact of the spending multiplier.

Question 22

Most of the U.S. national debt is owed to ____. Thus a rising national debt implies that there will be a future redistribution of income and wealth in favor of ____.

A) foreigners; foreigners
B) other U.S. citizens; bondholders
C) foreigners; those needing government services
D) other U.S. citizens; those needing government services

Question 23

When crowding out occurs, higher government spending results in higher interest rates, which in turn results in:

A) higher inflation.
B) less consumption and investment.
C) a larger debt ceiling.
D) more tax revenues.

Question 24

If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?

A) It will make fiscal policy more potent.
B) It will make fiscal policy less potent.
C) The potency of fiscal policy will be unaffected.
D) The potency of only contractionary fiscal policy will be reduced .

Question 25

Which of the following owns the largest proportion of the national debt?

A) foreigners
B) federal, state, and local governments and the Federal Reserve
C) private individuals, banks, and corporations
D) foreign governments

Question 26

"Crowding in" refers to federal government deficits:

A) which lead to increases in private sector spending .
B) which reduce private business and consumption spending.
C) which reduce future rates of economic growth.
D) when the economy is at full employment.

Question 27

One concern over external national debt is that interest and principal payments transfer wealth overseas. The percentage of the national debt held in recent years by foreigners is approximately:

A) 10 percent.
B) 20 percent.
C) 30 percent.
D) 50 percent.

Question 28

Which of the following is a valid concern about federal budget deficits?

A) The welfare of future generations will be directly related to the per-capita size of the national debt that they inherit.
B) Growth of the national debt will eventually lead to the bankruptcy of the government.
C) When the debt comes due, future generations may be unable to pay it off.
D) If the increases in the national debt reduce private expenditures on capital formation, aggregate demand is reduced.

Question 29

According to the crowding-out view, budget deficits will:

A) reduce interest rates.
B) increase interest rates and retard private investment.
C) reduce the investments of foreigners in the United States.
D) increase the capital stock available to future generations.

Question 30

Supply-side economists argue that less government spending:

A) would make more investment capital available at lower rates of interest to the private sector.
B) will result in more crowding out.
C) causes higher rates of unemployment and inflation.
D) would cause interest rates to increase dramatically.

Question 31

Supply-siders argue that:

A) reductions in government spending cut infrastructure investment which hurts private sector investment.
B) increases in government spending increase infrastructure investment which helps private sector investment.
C) increases in government spending causes private sector investment to fall because the government pushes up interest rates.
D) reductions in government spending cause private sector investment to fall because the government pushes up interest rates by borrowing.

Question 32

Which of the following statements about crowding out is false ?

A) It is not caused by a budget surplus.
B) It is caused by a budget deficit.
C) It can completely offset the government's debt
D) It affects interest rates and not economic growth.

Question 33

Which of the following would be  true if all the national debt were owned internally?

A) The federal government would not need to refinance the national debt.
B) The federal government would not need to worry about raising taxes to pay interest on the national debt.
C) We would still be concerned about the effect on the distribution of income from interest payments on the national debt.
D) Budget surpluses would be more likely than budget deficits.

Question 34

Crowding out occurs when the federal government:

A) raises taxes to finance a budget deficit.
B) refinances maturing U.S. Treasury bonds.
C) borrows by selling bonds to finance a deficit.
D) uses a budget surplus to pay off part of the national debt.

Question 35

Supply-siders feel that high levels of government spending:

A) assist private sector investing by creating infrastructure.
B) have no impact on private sector investment.
C) complement private spending.
D) cause private sector investment to decline because of crowding out.

Question 36

The crowding-out effect refers to:

A) higher interest rates and reduced private spending that results from financing federal budget deficits.
B) higher future taxes accompanying budget deficits to reduce private consumption.
C) the inflation rate to rise when the unemployment rate is low.
D) increases in private savings to reduce interest rates and, thereby, crowd-out government

Question 37

If the economy is at full employment:

A) the aggregate demand curve cannot shift to the right.
B) government spending causes crowding in.
C) Keynesians argue that any crowding-out effect is small.
D) crowding out is complete.

Question 38

Can the U.S. federal government go broke as a result of a large national debt?

Question 39

A concern about crowding out caused by increased government borrowing is that:

A) interest rates on private borrowing fall.
B) lower rates of economic growth can result from a decline in business investment spending.
C) the federal government may default on its loans.
D) foreign lenders find it less attractive to help finance federal deficits.

Question 40

"Crowding out" refers to federal government deficits financed by:

A) borrowing which increases interest rates and thereby reduces private spending.
B) increasing taxes which reduces private spending.
C) the federal government buying foreign debt which reduces the amount of government spending and government programs.
D) reducing government spending which reduces interest rates.

Question 41

Are we passing the national debt burden on to our children?

Question 42

Does government borrowing crowd out private sector spending?