Deck 6: The Government Budget, the Government Debt, and the Limitations of Fiscal Policy

Question 1

In the period 1980-92,United States net national saving fell due to

A)large budget deficits and an increase in private saving.
B)small budget deficits and a decrease in private saving.
C)small budget deficits and an increase in private saving.
D)large budget deficits and a decrease in private saving.

Answer 1

large budget deficits and a decrease in private saving.

Question 2

Suppose we have an economy for which G = 300,T = 240,S = 80,I = 45,and imports = 40.Exports must be

A)25.
B)40.
C)15.
D)65.
E)-25.

Answer 2

15.

Question 3

The three ways of reducing a government budget deficit are to

A)decrease government spending,reduce consumption,increase the tax rate.
B)increase government spending,decrease real income,reduce the tax rate.
C)decrease government spending,increase real income,reduce the tax rate.
D)decrease government spending,increase real income,increase the tax rate.

Answer 3

decrease government spending,increase real income,increase the tax rate.

Question 4

The 2001 recession was caused principally by

A)a slowing in the growth of the money supply.
B)a drop in autonomous consumption spending.
C)a decrease in government spending.
D)a drop in real business investment.

Question 5

In a small open economy,when exports exceed imports,all of the following are true EXCEPT

A)net capital outflows are positive.
B)net exports are positive.
C)domestic investment exceeds domestic saving.
D)domestic output exceeds spending.

Question 6

Suppose we are modeling a "closed" economy.The only way its government can obtain more goods and services than it can claim with net tax revenues is for

A)exports to exceed imports.
B)imports to exceed exports.
C)investment to exceed saving.
D)saving to exceed investment.

Question 7

In a small open economy,the real interest rate will always be

A)above the world real interest rate.
B)below the world real interest rate.
C)equal to the world real interest rate.
D)independent of the world real interest rate.

Question 8

In the 1980s national savings declined as a percentage of GDP.Assuming that domestic private investment's percentage share has not declined,this situation requires,ceteris paribus,

A)net foreign investment (NX)to decrease.
B)net foreign investment (NX)to increase.
C)U.S.exports to decrease.
D)A and C are both necessary outcomes.

Question 9

If monetary policy is used to control real GDP then fiscal policy is a major determinant of

A)interest rates and economic growth.
B)interest rates and the foreign trade deficit.
C)unemployment and the foreign exchange rate.
D)None of the above.

Question 10

Suppose we have an economy for which G = 1100,T = 800,S = 230,and I = 230.If I falls to 150,the economy's trade deficit

A)increases from 0 to 80.
B)decreases from 300 to 220.
C)decreases from 0 to -80.
D)decreases from 70 to -10.
E)increases from 0 to 70.

Question 11

Historical data suggests that a trend toward ________ natural employment ________.

A)larger,deficits from the early 1960s to the mid-1980s.
B)larger,surpluses form the early 1960s to the mid-1980s.
C)smaller,surpluses form the mid-1980s to 1995.
D)larger,surpluses from the mid-1980s to 1995.

Question 12

Once monetary policy is dedicated to controlling the level of nominal GDP,then fiscal policy can be used to

A)choose the overall level of interest rates,with a high budget surplus implying a high level of interest rates.
B)choose the overall level of interest rates,with a high budget deficit implying a high level of interest rates.
C)control the level of inflation,with a high budget surplus implying a faster rate of inflation.
D)control the level of inflation,with a high budget deficit implying a faster rate of inflation.

Question 13

During the fiscal expansion associated with the Vietnam war,what type of expenditures was initially "crowded out?"

A)autonomous consumption
B)nonresidential fixed investment
C)residential construction
D)nonresidential construction

Question 14

In the 1980s,expansionary fiscal policy is believed to have crowded out

A)domestic investment as interest rates rose.
B)exports and imports as interest rates rose.
C)exports but not domestic investment as interest rates rose.
D)domestic investment as interest rates fell.

Question 15

In the late 1980s the U.S.government ran a succession of large budget ________ which resulted mainly in ________ crowding-out.

A)deficits,domestic
B)deficits,international
C)surpluses,domestic
D)surpluses,international

Question 16

If an economy uses monetary policy as its stabilization tool,the real interest rate and thus ________-run economic welfare depend on that economy's ________ policy.

A)short,monetary
B)short,fiscal
C)long,monetary
D)long,fiscal

Question 17

The economic policy response to the 2001 recession consisted of

A)a rapid change in fiscal policy and monetary policy.
B)a sluggish change in fiscal policy and monetary policy.
C)a rapid change in fiscal policy and a sluggish change in monetary policy.
D)a sluggish change in fiscal policy and a rapid change in monetary policy.

Question 18

By far the largest real government budget deficits measured as a percentage of natural real GDP occurred during

A)World War I.
B)the Great Depression.
C)World War II.
D)the late 1960s.
E)the late 1980s and early 1990s.

Question 19

If monetary policy is used to control GDP,there is greater sacrifice of long-run economic growth in pursuing short-run stabilization the ________ is fiscal policy and thus the ________ is the real interest rate.

A)tighter,higher
B)tighter,lower
C)easier,higher
D)easier,lower

Question 20

In a small open economy,an increase in government spending,while taxes remain the same,will be accompanied by

A)a decrease in private investment and an increase in privates saving.
B)an increase in private investment and a decrease in private savings.
C)a decrease in national savings and an increase in foreign borrowing.
D)an increase in national savings and a decrease in foreign borrowing.

Question 21

In 1990-1991,the government budget deficit ________ mainly due to the ________.

A)rose,recession's effect on tax collection
B)rose,expenditures of the Persian Gulf War
C)fell,recession's effect on government expenditures
D)fell,economic stimulus provided by the Persian Gulf War

Question 22

Persistent government budget deficit result in ________ taxes and a ________ stock of capital in the future.

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

Question 23

The relation S + (T -G)= I + NX describing the equilibrium of an economy explicitly demonstrates

A)deficit spending by the government reduces either investment and/or net foreign investment.
B)deficit spending reduces private saving (assuming net foreign investment remains unchanged).
C)as private saving increases net foreign investment must decrease,exports decline.
D)as private saving increases the deficit must decline if investment decreases.

Question 24

The progressive income tax is an automatic stabilizer with respect to the Federal government's budget surplus or deficit because

A)individuals must "automatically" pay taxes even when they have a deficit.
B)during periods of output growth,a greater percentage of real income "leaks" from the expenditure stream.
C)during periods of output growth,the marginal leakage rate increases as taxes decrease.
D)None of the above.

Question 25

Figure 5-1

In Figure 5-1 above,the impact of automatic stabilization is depicted by the movement from

A)A to F.
B)A to B.
C)A to C.
D)D to A.

Question 26

The cyclical deficit is

A)the amount by which the actual government budget deficit exceeds the structural deficit.
B)the amount by which structural deficit exceeds the actual budget deficit.
C)the same as the structural deficit.
D)what the budget deficit would be if the economy were operating at the natural real GDP level.

Question 27

The natural employment surplus ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A)cannot;it excludes non-discretionary spending changes
B)can;it includes non-discretionary spending changes
C)cannot;it includes non-discretionary spending changes
D)can;it excludes automatic stabilization expenditures

Question 28

The structural surplus is

A)the difference between the actual surplus and the natural employment surplus and it increases whenever income rises.
B)identical to the natural employment surplus and it increases whenever tax rates are cut.
C)identical to the natural employment surplus and it decreases whenever the natural level of output increases.
D)identical to the natural employment surplus and it increases whenever the natural level of output increases.

Question 29

A deliberate change in the government's deficit

A)constitutes discretionary fiscal policy.
B)leads to automatic stabilization.
C)acts as a drag on the economy.
D)is implemented by the Fed.

Question 30

The natural employment surplus is

A)G + T.
B)Y - tYN.
C)tYN - G.
D)YN + G + tYN.

Question 31

Figure 5-1

In Figure 5-1 above,if the budget line BB₀,the natural real GDP is $5300,and actual real GDP is $5000,then the cyclical budget surplus or deficit is the

A)horizontal distance between A and F.
B)vertical distance between F and D.
C)vertical distance A and F.
D)horizontal distance between B and D.

Question 32

Which of the following effects takes place as a result of automatic stabilization?

A)extra tax revenues are generated in a boom
B)tax revenues remain constant during a recession
C)leakages increase during a recession,helping to stimulate the economy
D)Both A and C are correct.

Question 33

The actual government budget deficit ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A)cannot;it excludes non-discretionary spending changes
B)can;it includes non-discretionary spending changes
C)cannot;it includes non-discretionary spending changes
D)can;it excludes automatic stabilization expenditures

Question 34

Figure 5-1

Employing the government budget diagram shown in Figure 5-1 above,assume that the economy is initially in equilibrium at point A.The movement A to D represents

A)an increase in government spending and/or a decrease in taxes.
B)a decrease in government spending and/or an increase in taxes.
C)a decrease in government spending and a decrease in taxes.
D)an increase in government spending and an increase in taxes.

Question 35

An increase in the tax rate (t)

A)will rotate the budget line upward.
B)will increase the slope of the budget line.
C)will shift the budget line downward.
D)A and B.

Question 36

The structural deficit is

A)the difference between the actual deficit and the natural employment deficit and it increases whenever income rises.
B)identical to the natural employment deficit and it decreases whenever tax rates are cut.
C)identical to the natural employment deficit and it increases whenever the natural level of output increases.
D)identical to the natural employment deficit and it decreases whenever the natural level of output increases.

Question 37

Figure 5-1

In Figure 5-1 above,if the budget line is BB₀ and the natural real GDP is $5300,the structural surplus or deficit is

A)FC.
B)AD.
C)FA.
D)none of the above.

Question 38

The actual government budget surplus ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A)cannot;it excludes non-discretionary spending changes
B)can;it includes non-discretionary spending changes
C)cannot;it includes non-discretionary spending changes
D)can;it excludes automatic stabilization expenditures

Question 39

The natural employment deficit ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________.

A)cannot;it excludes non-discretionary spending changes
B)can;it includes non-discretionary spending changes
C)cannot;it includes non-discretionary spending changes
D)can;it excludes automatic stabilization expenditures

Question 40

A prominent postwar pattern of U.S.government budget deficits was broken in 1983-1990 as

A)recession was accompanied by a shrinking deficit.
B)recession was accompanied by a growing deficit.
C)recovery from recession was accompanied by a shrinking deficit.
D)recovery from recession was accompanied by a growing deficit.

Question 41

An increase in government expenditures that ________ the budget deficit in an example of ________.

A)raises,automatic stabilization
B)raises,discretionary fiscal policy
C)lowers,automatic stabilization
D)lowers,discretionary fiscal policy

Question 42

A structural budget deficit

A)appeared during the Vietnam War era from 1966-68.
B)appeared after 1982 due to tax cuts and spending increases.
C)peaked at 5 percent of GDP in mid-1986 and had become a structural surplus by 1997.
D)all of the above.

Question 43

A large government budget deficit ________ government saving and ________ national saving.

A)raises,raises
B)raises,lowers
C)lowers,raises
D)lowers,lowers

Question 44

A government budget surplus

A)decreases a country's ability to finance domestic and foreign investment.
B)increases a country's ability to finance domestic and foreign investment.
C)increases a country's ability to finance domestic investment and decreases its ability to finance foreign investment.
D)decreases a country's ability to finance domestic investment and increases its ability to finance foreign investment.

Question 45

Given the average tax rate t,a general expression for the budget deficit is

A)tG - Y.
B)Y - tG.
C)G - tY.
D)Y - (G/t).

Question 46

Suppose we have an economy in which G = 1100,t = 0.26,Y = 3800,and YN = 4000.The natural employment deficit is

A)60.
B)200.
C)840.
D)286.
E)-112.

Question 47

In a closed economy,an increase in government spending,while taxes remain the same,will be accompanied by

A)a decrease in private investment and an increase in privates saving.
B)an increase in private investment and a decrease in private savings.
C)a decrease in private investment only.
D)an increase in private savings only.

Question 48

Suppose we have an economy in which G = 1100,t = 0.26,Y = 3800,and YN = 4000.At Y,the actual deficit is

A)60.
B)200.
C)112.
D)286.
E)-60.

Question 49

A crucial national income accounting identity sets the government budget deficit equal to

A)S - I - NX.
B)S + I - NX.
C)S - I + NX.
D)S + I + NX.

Question 50

If S = 250,T = 170,NX = -20,this makes government saving

A)-50.
B)-70.
C)70.
D)50.
E)-100.

Question 51

An increase in tax revenues ________ government saving and ________ national saving.

A)raises,raises
B)raises,lowers
C)lowers,raises
D)lowers,lowers

Question 52

A government budget deficit is financed by a combination of

A)saving rising relative to domestic investment and imports rising relative to exports.
B)saving rising relative to domestic investments and exports rising relative to imports.
C)domestic investment rising relative to saving and imports rising relative to exports.
D)domestic investment rising relative to saving and exports rising relative to imports.

Question 53

An increase in the average tax rate that ________ the budget deficit in an example of ________.

A)raises,automatic stabilization
B)raises,discretionary fiscal policy
C)lowers,automatic stabilization
D)lowers,discretionary fiscal policy

Question 54

In a closed economy,a decrease in government spending while taxes remain the same will be accompanied by

A)a decrease in private investment and an increase in privates saving.
B)an increase in private investment and a decrease in private savings.
C)a decrease in private investment only.
D)an increase in private savings only.

Question 55

Suppose we have an economy in which G = 1100,t = 0.26,Y = 3800,and YN = 4000.At Y the cyclical deficit is

A)60.
B)112.
C)-172.
D)-52.
E)52.

Question 56

If S = 200,T = 700,G = 950,and NX = -200,this makes net domestic investment

A)150.
B)-150.
C)50.
D)-50.
E)650.

Question 57

If S = 300,T = 800,G = 1100,and I = 150,this makes net foreign investment

A)150.
B)-150.
C)450.
D)750.
E)-450.

Question 58

A recession normally causes ________ in government net tax revenues,________ the budget deficit is an example of ________ automatic stabilization.

A)an increase,increasing,the working of
B)an increase,decreasing,a failure of
C)a decrease,decreasing,the working of
D)a decrease,increasing,a failure of
E)a decrease,increasing,the working of

Question 59

In the diagram of the budget line BB,a rise in government expenditure shifts BB ________,so that an unchanged GDP the budget deficit ________.

A)downward,rises
B)downward,falls
C)downward,remains unchanged
D)upward,rises
E)upward,falls

Question 60

With a vertical LM curve,an increase in the money supply can be matched by an equal increase in money demand only through ________,which causes monetary policy to be particularly ________.

A)a rise in income,strong
B)a rise in income,weak
C)a fall in the interest rate,strong
D)a fall in the interest rate,weak

Question 61

In the current debate over fiscal policy,advocates of returning to significant budget surpluses

A)contended that the economic miracle of the late 1990s caused the budget surpluses.
B)think that tax cuts will benefit the wealthy.
C)believe that tax cuts will continue the dependence of the United States on borrowing from foreigners.
D)All of the above.

Question 62

If a nation's budget deficit rises,domestic private investment can remain unchanged through some combination of ________ private saving and ________ importing relative to exporting.

A)increased,less
B)increased,more
C)decreased,less
D)decreased,more

Question 63

If the economy is growing 3% a year and the government increases the ratio of interest on the national debt to GDP,we may conclude that

A)the output ratio will fall.
B)additional interest payments exceed 3% of GDP.
C)tax revenues will fall.
D)the Laffer curve will be inoperable.

Question 64

Suppose we have an economy in which G = 100,t = 0.26,Y = 3800,and YN = 4000.Then t rises to 0.28 as the same time as G rises to 1150.The overall impact of this resettling of the fiscal variables is ________ because ________.

A)expansionary,the actual deficit rises
B)expansionary,the natural employment deficit falls
C)contractionary,the natural employment deficit falls
D)contractionary,the natural employment deficit rises
E)contractionary,the actual deficit rises

Question 65

Private savings and thus investment could be increased by which of the following government policies,ceteris paribus?

A)elimination of the corporate income tax
B)allowing corporations to use "replacement cost accounting"
C)exemption of interest earnings from income taxation
D)all of the above.

Question 66

Which of the following policies would NOT affect the natural unemployment rate?

A)a reduction in minimum wages
B)an increase in public-service employment
C)an increase in subsidized private employment
D)a reduction sales taxes

Question 67

The clearest indicator of a switch to a less expansionary fiscal policy is a

A)rise in the actual surplus.
B)fall in the actual surplus.
C)rise in the natural employment surplus.
D)fall in the natural employment surplus.

Question 68

The conditions for joining the "Euro" single-currency block led a number of European countries to ________ and consequently reduce their debt-GDP ratios.

A)tighten monetary policy
B)loosen monetary policy
C)loosen fiscal policy
D)tighten fiscal policy

Question 69

Actual output exceeds the natural output when

A)the actual budget deficit is above the structural deficit.
B)the actual budget deficit is below the structural deficit.
C)the structural deficit is positive.
D)the structural deficit is negative.

Question 70

If a country's private saving is 100 and government saving is -100,domestic private investment

A)must be 200.
B)must be zero.
C)is equal to the net amount the economy borrows from other countries.
D)is equal to the net amount the economy lends to other countries.

Question 71

An example of "automatic stabilizers" is a rise in ________ causing the budget deficit to ________.

A)real GDP,fall
B)real GDP,rise
C)government expenditures,fall
D)government expenditures,rise
E)the average tax rate,fall

Question 72

A major side-effect of a stimulative fiscal policy is that it will

A)discriminate in favor of housing.
B)crowd out private expenditures.
C)increase the natural rate of unemployment.
D)permanently raise the rate of inflation.

Question 73

Switching to a faster economic growth path comes at the cost of lower

A)present investment.
B)present consumption.
C)future investment.
D)present saving.
E)future saving.

Question 74

Which of the following is least likely to increase the ratio of investment to real GDP? A reduction in ________.

A)transfer payments
B)subsidies to farms and corporations
C)defense outlays
D)spending on highways

Question 75

A falling natural-employment deficit indicates that

A)the growth rate in the economy has increased.
B)the government is following a restrictive fiscal policy.
C)the government is following an expansionary fiscal policy.
D)the actual surplus is rising.

Question 76

Which of the following policies is likely to generate the smallest increase in national saving?

A)an increase in income taxes
B)an increase in consumption taxes
C)a cut in government transfer payments
D)None of the above policies will increase national saving.

Question 77

National saving is

A)the sum of private saving and government saving.
B)reduced by government budget deficits.
C)the sum of private saving and the government budget deficit or surplus.
D)all of the above.

Question 78

The clearest indicator of a switch to a less expansionary fiscal policy is a

A)rise in the actual deficit.
B)fall in the actual deficit.
C)rise in the natural employment deficit.
D)fall in the natural employment deficit.

Question 79

When a nation's national saving falls short of its domestic investment,it must be

A)experiencing a government budget surplus.
B)experiencing a government deficit.
C)a net lender to foreign nations.
D)a net borrower from foreign nations.

Question 80

If the economy is growing 5% a year and GDP is $1000 billion,the additional revenues available to meet interest payments on the government deficit would be,ceteris paribus,

A)50.
B)500.
C)It depends upon the amount of new debt issued.
D)There would be no additional revenues.