Deck 15: Fiscal Policy and the Government Budget in the Long Run

Question 1

Of the primary tax sources of revenue for the Canadian federal government,which of the following has displayed no long-term trend as a percentage of GDP since 1981?

A) corporate income taxes
B) social insurance taxes
C) GST (Manufacturer's Sales Tax prior to 1991)
D) individual income taxes

Answer 1

C

Question 2

The Canadian federal government obtains most of its revenues primarily through four main taxes.Which of the following is not one of the main sources of federal revenue?

A) corporate income taxes
B) social insurance contributions
C) excise taxes
D) individual income taxes

Answer 2

C

Question 3

Since 1992,Canadian federal expenditures have ________ as a percentage of GDP.

A) remained fairly stable
B) increased dramatically
C) slowly declined
D) been extremely volatile

Answer 3

C

Question 4

Gross federal debt is ________ net federal debt.

A) greater than
B) less than
C) the same as
D) the negative equivalent of

Question 5

Assuming seigniorage equals zero,the federal debt is ________ and the budget deficit is ________.

A) a flow variable representing the total value of government bonds outstanding; a stock variable representing the yearly increase in value of newly issued government bonds
B) a stock variable representing the total value of government bonds outstanding; a flow variable representing the yearly increase in value of newly issued government bonds
C) a flow variable representing the yearly increase in value of newly issued government bonds; a stock variable representing the total value of government bonds outstanding
D) a stock variable representing the yearly increase in value of newly issued government bonds; a flow variable representing the total value of government bonds outstanding

Question 6

The government's budget constraint is best represented by which of the following equations?

A) Government purchases of goods and services + Transfer payments + Interest payments on existing debt = Tax revenue + Newly issued government bonds + Seigniorage
B) Government purchases of goods and services + Transfer payments + Tax revenue = Interest payments on existing debt + Newly issued government bonds + Seigniorage
C) Tax revenue - Transfer payments = Government purchases of goods and services + Interest payments on existing debt + Newly issued government bonds + Seigniorage
D) Government purchases of goods and services + Newly issued government bonds + Interest payments on existing debt = Transfer payments + Tax revenue + Seigniorage

Question 7

The value of bonds outstanding

A) increases when the government runs a budget deficit and decreases when the government runs a budget surplus.
B) decreases when the government runs a budget deficit and increases when the government runs a budget surplus.
C) is independent of the government running either a budget deficit or a budget surplus.
D) changes only when the government runs a budget deficit or surplus if the federal debt is zero.

Question 8

Table 15.1

The data in the table represents budget figures for the nation of Arugula for 2012.
Refer to Table 15.1.The primary budget deficit for Arugula in 2012 is

A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.

Question 9

From 1995 through 2015,the debt-to-GDP ratio in Canada

A) has slowly increased.
B) has more than quadrupled.
C) has declined steadily.
D) has remained about average compared to other G7 countries.

Question 10

Table 15.1

The data in the table represents budget figures for the nation of Arugula for 2012.
Refer to Table 15.1.The budget deficit for Arugula in 2012 is

A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.

Question 11

A fiscal policy is considered sustainable when the debt-to-GDP ratio is ________,and it is considered unsustainable when the debt-to-GDP ratio is ________.

A) constant; increasing or decreasing
B) constant or decreasing; increasing
C) decreasing; constant or increasing
D) constant or increasing; decreasing

Question 12

Of the primary tax sources of revenue for the Canadian federal government,which have trended downward as a percentage of GDP since 1981?

A) corporate income and individual income taxes
B) social insurance and corporate income taxes
C) sales and social insurance taxes
D) individual income and sales taxes

Question 13

Table 15.1

The data in the table represents budget figures for the nation of Arugula for 2012.
Refer to Table 15.1.The sources of government funds for Arugula in 2012 total

A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.

Question 14

The most important source of revenue for the federal government is

A) tax revenue.
B) investment income from the Bank of Canada.
C) seigniorage.
D) import tariffs.

Question 15

Of the primary tax sources of revenue for the Canadian federal government,which of the following has increased the most as a percentage of GDP since 1981?

A) corporate income taxes
B) social insurance taxes
C) sales and excise taxes
D) individual income taxes

Question 16

Table 15.1

The data in the table represents budget figures for the nation of Arugula for 2012.
Refer to Table 15.1.The uses of government funds for Arugula in 2012 total

A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.

Question 17

The government's budget deficit is best represented by which of the following equations?

A) Budget deficit = Government purchases of goods and services + Transfer payments + Interest payments on existing debt + Seigniorage
B) Budget deficit = Government purchases of goods and services + Transfer payments + Tax revenue+ Newly issued government bonds
C) Budget deficit = Government purchases of goods and services + Interest payments on existing debt + Newly issued government bonds + Seigniorage + Transfer payments - Tax revenue
D) Budget deficit = Government purchases of goods and services + Transfer payments - Tax revenue + Interest payments on existing debt

Question 18

Economists who are concerned with the effect of fiscal policy on the ability of households and firms to borrow to finance consumption will focus on ________,and economists who want to know whether the government's fiscal policy is sustainable will focus on ________.

A) yearly budget deficits; the federal debt
B) the federal debt; yearly budget deficits
C) yearly budget deficits; both the federal debt and yearly budget deficits
D) the federal debt; both the federal debt and yearly budget deficits

Question 19

Since 1981,which of the following federal expenditures,measured by its share of federal government spending,has decreased the most?

A) old age security payments
B) goods and services
C) transfers to other governments
D) interest on debt

Question 20

Since 1981,the annual revenue received by the Canadian federal government from taxes has averaged roughly ________ of GDP,and the annual revenue received from seigniorage has averaged ________ of GDP.

A) 50%; 5%
B) 7%; more than 36%
C) 17%; less than 1%
D) 40%; 10%

Question 21

A decrease in the inflation rate will lead to a ________ nominal interest rate,which will ________ the debt-to-GDP ratio.

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

Question 22

Holding everything else constant,if total factor productivity ________ or if the labour force growth rate ________ the debt-to-GDP ratio will increase.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 23

Assume that seigniorage and the government's primary deficit are both zero.If the real interest rate is greater than the growth rate of real GDP,the debt-to-GDP ratio

A) will increase.
B) will decrease.
C) will either decrease or not change.
D) will either increase or not change.

Question 24

Table 15.3
Cordelia Saldinia

The above table contains data for the nations of Cordelia and Saldinia for 2012. Assume seigniorage is zero.
Refer to Table 15.3.Based on the data in the table,fiscal policy in Cordelia is ________ and fiscal policy in Saldinia is ________.

A) sustainable; sustainable
B) sustainable; unsustainable
C) unsustainable; sustainable
D) unsustainable; unsustainable

Question 25

When the nominal interest rate is not constant,an increase in the growth rate of the money supply ________ the inflation rate,and ________ the debt-to-GDP ratio.

A) increases; increases
B) increases; decreases
C) increases; has an ambiguous effect on
D) decreases; increases

Question 26

Table 15.2

The data in the table represents budget figures for the nation of Harmonia for 2012.
Refer to Table 15.2.From the information presented in the table,calculate the following values for the nation of Harmonia in 2012:
a. the budget deficit
b. the primary budget deficit
c. the uses of government funds
d. the sources of government funds

Question 27

Assume that seigniorage and the government's primary deficit are both zero.A change in the debt-to-GDP ratio depends on just

A) the rate of inflation and total factor productivity.
B) the growth rate of real GDP and the real interest rate.
C) the growth rate of the money supply and the nominal interest rate.
D) the growth rate of nominal GDP and the rate of inflation.

Question 28

Table 15.3
Cordelia Saldinia

The above table contains data for the nations of Cordelia and Saldinia for 2012. Assume seigniorage is zero.
Refer to Table 15.3.Based on the data in the table,the primary budget deficit necessary to make fiscal policy sustainable in Saldinia is ________ of GDP.

A) -5.3%
B) -1.1%
C) 1.1%
D) 6.5%

Question 29

For each of the following scenarios,state the effect on the debt-to-GDP ratio:
a. The growth rate of the labour force increases.
b. The primary deficit increases.
c. Total factor productivity decreases.
d. Seigniorage decreases.
e. The nominal interest rate is constant and the growth rate of the money supply increases.
f. The nominal interest rate is not constant and the growth rate of the money supply increases.

Question 30

The debt-to-GDP ratio decreases when the primary deficit ________ or when seigniorage ________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 31

Since 1981,which of the following federal expenditures,measured by their share of federal government spending,have increased the most?

A) transfers to other governments and interest on debt
B) transfers to other governments and old age security payments
C) goods and services and interest on debt
D) goods and services and old age security payments

Question 32

Table 15.3
Cordelia Saldinia

The above table contains data for the nations of Cordelia and Saldinia for 2012. Assume seigniorage is zero.
Refer to Table 15.3.Based on the data in the table,the primary budget deficit necessary to make fiscal policy sustainable in Cordelia is ________ of GDP.

A) -1.5%
B) 0%
C) 1.5%
D) 14.6%

Question 33

Holding everything else constant,if total factor productivity increases,the debt-to-GDP ratio will ________,and if the labour force growth rate increases,the debt-to-GDP ratio will ________.

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

Question 34

Assume that seigniorage and the government's primary deficit are both zero.If the real interest rate is less than the growth rate of real GDP,fiscal policy ________,and if the real interest rate is greater than the growth rate of real GDP,fiscal policy ________.

A) is sustainable; may be sustainable
B) is unsustainable; is sustainable
C) is sustainable; is unsustainable
D) is unsustainable; may be sustainable

Question 35

An increase in the inflation rate will lead to a ________ nominal interest rate,which will ________ the debt-to-GDP ratio.

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

Question 36

Holding everything else constant,if the nominal interest rate decreases,the interest paid on the debt ________ the debt-to-GDP ratio,and nominal GDP growth ________ the debt-to-GDP ratio.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 37

What are the differences between the federal debt,the budget deficit,and the primary budget deficit?

Question 38

Explain why debt is usually measured using the debt-to-GDP ratio rather than the absolute amount of debt.

Question 39

When the nominal interest rate is constant,________ in the growth rate of the money supply ________ the inflation rate,and ________ the debt-to-GDP ratio.

A) an increase; increases; increases
B) an increase; decreases; increases
C) a decrease; decreases; decreases
D) a decrease; decreases; increases

Question 40

The debt-to-GDP ratio increases when the primary deficit ________ or when seigniorage ________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 41

If the government issues new government bonds to finance a budget deficit,the real interest rate in financial markets will ________ and investment spending will ________.

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

Question 42

Explain why many economists are skeptical about whether Ricardian equivalence describes the behaviour of households in the economy.

Question 43

The conventional view among economists is that persistent budget ________ lead to a lower level of potential GDP in the ________ run.

A) surpluses; short and long
B) surpluses; short
C) deficits; short
D) deficits; long

Question 44

Suppose that for the nation of Calliope,the debt-to-GDP ratio is 325%,the average annual growth rate is 1.1%,the average inflation rate is 0.5%,and the average nominal interest rate is 2.2%.Based on this information,determine if fiscal policy is sustainable in Calliope,and if not,what the primary budget deficit would have to be to make fiscal policy sustainable.

Question 45

Ricardian equivalence suggests that forward-looking households ________ the future taxes required to pay off government debt,so that reductions in lump-sum taxes have ________ effect on the economy.

A) fully anticipate; a multiplied
B) fully anticipate; no
C) are unaware of; a negative
D) are unaware of; a positive

Question 46

The conventional view among economists is that persistent budget deficits lead to ________ real interest rates and ________ private investment.

A) higher; crowd in
B) higher; crowd out
C) lower; crowd in
D) lower; crowd out

Question 47

All of the following are possible private-sector adjustments to an increase in the government's budget deficit,except

A) increasing private savings.
B) decreasing investment.
C) decreasing expenditures on transfer programs.
D) increasing the trade deficit by increasing imports and/or decreasing exports.

Question 48

Based on the conventional view of fiscal policy and potential GDP in the long run,explain what happens to each of the following if the government runs a budget deficit:
a. the supply of loanable funds to the private sector
b. long-term real interest rates
c. the capital stock
d. the investment rate
e. potential GDP

Question 49

The conventional view among economists is that persistent budget deficits lead to a ________ capital stock and a ________ level of potential GDP in the long run.

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

Question 50

What is necessary for fiscal policy to be sustainable? Why is fiscal policy in countries like Greece,Ireland,Spain,Italy,and Portugal not considered sustainable?

Question 51

The government's budget deficit is financed by some combination of all of the following except

A) private saving.
B) transfer payments.
C) net exports.
D) reduced private investment.

Question 52

List the three possible ways the government can make adjustments to an increase in the government's budget deficit.

Question 53

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,private saving will ________ this year and ________ next year,all else equal.

A) increase by $300 million; decrease by $300 million
B) increase by $150 million; decrease by $150 million
C) increase by $300 million; not change
D) not change; not change

Question 54

If the government decreases income taxes by $500 billion and does not pursue a policy change,which of the following would require the private sector to adjust in order to finance the tax decrease?

A) Increase other taxes by $500 billion.
B) Reduce transfer payments by $500 billion.
C) Reduce expenditures on programs such as education or defence by $500 billion.
D) Issue $500 billion in new Treasury bonds.

Question 55

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,consumption spending will ________ this year and ________ next year,all else equal.

A) increase by $300 million; decrease by $300 million
B) increase by $150 million; decrease by $150 million
C) increase by $300 million; not change
D) not change; not change