Deck 12: Deficits and Debt

Question 1

A budget surplus is

A)An excess of government spending over government revenues in a given time period.
B)An excess of government revenues over government expenditures in a given time period.
C)Used only in time of war.
D)None of the choices are correct.

Answer 1

B

Question 2

Which of the following is an argument against balancing the federal budget?

A)The federal government interferes with the economy too much.
B)An increase in government spending and taxes by the same amount does not affect income.
C)Doing so may prevent the government from pulling the economy out of recession.
D)None of the choices are correct.

Answer 2

C

Question 3

If the economy is in a recession,

A)It is operating inside the production possibilities curve,and the opportunity cost of deficit spending is zero.
B)Deficit spending will not increase the size of the debt because interest rates will be falling.
C)The economy suffers from structural unemployment,which can be alleviated by debt refinancing.
D)Larger deficits will decrease the national debt.

Answer 3

A

Question 4

In order to reduce the U.S.debt,

A)The government must use deficit spending.
B)The government should spend less than it collects in tax revenues.
C)There will be a transfer of revenue from bondholders to taxpayers.
D)Foreign governments must lend more money to the U.S.government.

Question 5

Discretionary expenditures account for approximately

A)One-fifth of the federal budget.
B)One-half of the federal budget.
C)One-third of the federal budget.
D)Three-fourths of the federal budget.

Question 6

The fiscal year for the federal government begins on

A)January 1.
B)The first Monday in January.
C)November 1.
D)October 1.

Question 7

Which of the following is true about the U.S.federal government budget for the year 1998?

A)The U.S.Constitution was amended to require a balanced federal budget.
B)The federal budget deficit was the largest in history.
C)Federal government receipts were greater than federal government spending for the first time in more than 25 years.
D)Federal government outlays were greater than federal government receipts for the first time in more than 25 years.

Question 8

Deficit spending results whenever the government

A)Issues bonds to finance the debt.
B)Finances current expenditures that exceed current tax revenues.
C)Refinances the debt.
D)None of the choices are correct.

Question 9

The elements of the federal budget not determined by past legislative or executive commitments are

A)Uncontrollable fiscal spending.
B)Fiscal restraint items.
C)Discretionary fiscal spending.
D)Automatic stabilizers.

Question 10

The fiscal year

A)Is the 12-month period used for federal government accounting purposes.
B)Begins in January for the federal government.
C)Is the period during which the government must balance the budget.
D)None of the choices are correct.

Question 11

According to Keynes,an unbalanced budget is appropriate in all of the following situations except

A)The economy is below full employment.
B)Leakages and injections are out of balance.
C)Macro equilibrium is above full employment.
D)The economy is at full employment.

Question 12

Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?

A)More government expenditure and higher taxes.
B)More government expenditure and lower taxes.
C)Less government expenditure and higher taxes.
D)Less government expenditure and lower taxes.

Question 13

If full-employment output exceeds equilibrium output,greater deficit spending will result in a

A)Smaller recessionary gap.
B)Smaller inflationary gap.
C)Larger recessionary gap.
D)None of the choices are correct.

Question 14

With an increase in deficit spending,the

A)U.S.Treasury buys more bonds.
B)U.S.exports increase.
C)Aggregate supply curve shifts to the right.
D)Aggregate demand curve shifts to the right.

Question 15

Which of the following represents the use of fiscal policy to achieve a fiscal stimulus?

A)Greater government expenditure or lower taxes.
B)Greater government expenditure or higher taxes.
C)Lower government expenditure or lower taxes.
D)Lower government expenditure or higher taxes.

Question 16

When there is excess aggregate demand,the appropriate fiscal policy would be for the government to

A)Make budget surpluses smaller.
B)Make budget surpluses larger.
C)Make budget deficits larger.
D)Increase the public debt.

Question 17

The use of government taxes and spending to alter economic outcomes is known as

A)Monetary policy.
B)Fiscal policy.
C)Incomes policy.
D)Foreign trade policy.

Question 18

With greater deficit spending,ceteris paribus,

A)Aggregate spending should fall.
B)Any inflationary gap will become larger.
C)There are greater leakages.
D)There is inadequate information to tell what happens to aggregate spending.

Question 19

If full-employment income and equilibrium income are equal for a country,then a tax cut will result in

A)Excess AD.
B)Output exceeding desired expenditure.
C)Leakages exceeding injections.
D)Undesired inventory accumulation.

Question 20

Which of the following is an appropriate fiscal policy prescription for the government to follow?

A)Deficit reduction during a recession.
B)Deficit reduction when there is excess AD.
C)Deficit expansion in an inflationary gap.
D)Deficit reduction during a war.

Question 21

In contrast to the structural deficit,the cyclical deficit reflects

A)Fluctuations in economic activity.
B)Fiscal policy decisions.
C)Changes in discretionary fiscal policy.
D)Changes in the "full-employment" deficit.

Question 22

Which of the following might encourage the government to let inflation rates rise?

A)The government has more work to do when there is an AD excess.
B)The government has to make higher interest payments with higher inflation rates.
C)Social Security and retirement benefits are indexed.
D)A higher inflation rate reduces the budget deficit.

Question 23

Uncontrollable government spending includes

A)Interest payments on the national debt.
B)Spending decisions made in the current year.
C)Approximately half of the government spending in the United States.
D)Welfare benefits but not unemployment benefits.

Question 24

A progressive income tax system is particularly effective as an automatic stabilizer because

A)It reduces demand when income falls.
B)In a booming economy,taxpayers move into higher tax brackets,which restrains their spending.
C)During a recession,it causes the budget deficit to fall.
D)It falls more heavily on taxpayers with high MPCs,which stimulates aggregate demanD.Progressive income taxes are particularly effective stabilizers because they siphon off increasing proportions of purchasing power when incomes are rising and decreasing proportions when aggregate demand and output are falling.

Question 25

In order to maintain a balanced budget every year,during a recession the government would have to

A)Decrease the money supply.
B)Increase the money supply.
C)Decrease spending or increase taxes or both.
D)Increase spending or decrease taxes or both.

Question 26

For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy,the actual deficit is divided into which of the following components?

A)Automatic stabilizers and autonomous consumption.
B)C,I,G,X,and M.
C)Structural and cyclical deficits.
D)Frictional and seasonal deficits.

Question 27

All of the following contribute to greater deficits when unemployment rises and reduce the deficit during an inflationary gap except for

A)U.S.exports.
B)Welfare benefits.
C)Progressive personal income taxes.
D)Unemployment insurance benefits.

Question 28

Which of the following is not an automatic stabilizer?

A)Progressive income taxes.
B)Unemployment benefits.
C)Welfare payments.
D)Defense spending.

Question 29

Which of the following is a possible effect of automatic stabilizers on the federal budget?

A)A decrease in the deficit during recessions.
B)An increase in the deficit when there is AD excess.
C)An increase in the structural deficit during recessions.
D)A decrease in the deficit during an expansion.

Question 30

Which of the following is an automatic stabilizer that reduces tax receipts during a recession?

A)Welfare benefits.
B)Medicaid.
C)Corporate and individual income taxes.
D)Indexed retirement and Social Security benefits.

Question 31

Automatic stabilizers tend to stabilize the level of economic activity because they

A)Are changed quickly by Congress.
B)Increase the size of the multiplier.
C)Increase spending during recessions and reduce spending during inflationary periods.
D)Control the rate of change in prices.

Question 32

Which of the following is most likely to reduce a federal budget surplus?

A)A booming economy with rising inflation rates.
B)A recession.
C)Higher inflation and higher unemployment rates.
D)Lower inflation and lower unemployment rates.

Question 33

If the cyclical deficit shrank by $60 billion while the structural deficit increased by $35 billion,the total deficit

A)Fell by $25 billion.
B)Grew by $25 billion.
C)Grew by $95 billion.
D)Fell by $60 billion.

Question 34

An increase in unemployment,ceteris paribus,

A)Leads to decreased government expenditures.
B)Leads to increased government revenues.
C)Reduces a budget surplus.
D)Reduces a budget deficit.

Question 35

Much of each year's federal budget is considered "uncontrollable" because

A)It must be spent for purchases,as opposed to transfer payments.
B)Most of the current revenues and expenditures are the result of decisions made in prior years.
C)It is determined by decision makers who do not have the power to change spending and taxes.
D)None of the choices are correct.

Question 36

Automatic stabilizers

A)Are included in discretionary fiscal spending.
B)Cause spending to decrease during a recession.
C)Help to moderate the extremes of the business cycle.
D)Are zero at full employment.

Question 37

Fiscal restraint is

A)Tax hikes and/or spending cuts intended to reduce aggregate demand.
B)Changes in taxes and spending intended to increase aggregate supply.
C)Tax cuts or spending increases meant to reduce aggregate demand.
D)Not possible because Congress continues to spend too much money.

Question 38

Which of the following results from a change in the business cycle,ceteris paribus?

A)Frictional unemployment.
B)Cyclical unemployment.
C)Structural unemployment.
D)Structural deficit.

Question 39

Which of the following is most likely to increase a federal budget surplus?

A)A higher inflation rate and a higher unemployment rate.
B)A higher inflation rate and a lower unemployment rate.
C)A lower inflation rate and a higher unemployment rate.
D)A lower inflation rate and a lower unemployment rate.

Question 40

Spending for unemployment compensation and welfare benefits increase automatically

A)When the economy expands.
B)When the economy goes into recession.
C)When voters make the decision to increase these items.
D)Only when the fiscal year begins.

Question 41

If the total budget deficit is $200 billion and the deficit at full employment is $120 billion,then the

A)Cyclical deficit is $120 billion.
B)Cyclical deficit is $80 billion.
C)Structural deficit is $320 billion.
D)Structural deficit is $80 billion.

Question 42

Which of the following is the best indication that the government is pursuing restrictive fiscal policy?

A)The total deficit increases.
B)The structural deficit increases.
C)The cyclical deficit increases.
D)The structural deficit decreases.

Question 43

Which of the following would occur if the federal government decided to use a budget surplus to reduce the existing debt?

A)Crowding out and public sector output would increase.
B)Crowding out and public sector output would decrease.
C)Crowding in and private sector output would increase.
D)Crowding in and private sector output would decrease.

Question 44

The U.S.government incurred a national debt for the first time during

A)World War II.
B)Ronald Reagan's presidency.
C)The Revolutionary War.
D)The Great Depression.

Question 45

Which of the following is not true when the economy is fully employed and government bonds are sold to finance greater government spending?

A)This pushes the economy along its production possibilities curve toward more public sector goods.
B)This action results in crowding out.
C)The government is running a structural deficit.
D)The government is running a cyclical deficit.

Question 46

The government can use a budget surplus to do all of the following except

A)Decrease taxes.
B)Increase income transfers.
C)Increase expenditures on goods and services.
D)Decrease the money supply.

Question 47

If there was a federal budget surplus and the government decided to either increase spending or decrease taxes,

A)The budget surplus would get smaller.
B)The budget surplus would get larger.
C)The budget surplus would remain unchanged.
D)None of the choices are correct.

Question 48

Increased government purchases crowd out private purchases whenever the economy is

A)Experiencing an AD shortfall.
B)On the production possibilities curve.
C)Facing serious cyclical unemployment.
D)Operating below full employment.

Question 49

The structural deficit represents

A)Federal revenues minus federal expenditures at full employment under current fiscal policy.
B)Federal revenues minus expenditures under current fiscal policy at current output.
C)A measure of the size of recessionary or inflationary gaps.
D)The difference between expenditures at full employment and expenditures at cyclical unemployment.

Question 50

An increase in private sector borrowing and spending caused by decreased government borrowing is known as

A)Crowding out.
B)Crowding in.
C)Crowding debt.
D)Debt reduction.

Question 51

The largest percentage of U.S.national debt to GDP occurred during

A)The Civil War.
B)World War I.
C)World War II.
D)The Great Depression.

Question 52

Suppose the economy is at a full-employment GDP of $1 trillion and the tax revenue received by the federal government is always one-fifth of GDP.If planned government expenditure is $300 billion,the structural

A)Deficit is zero.
B)Deficit is $100 billion.
C)Surplus is $100 billion.
D)Deficit is $500 billion.

Question 53

The national debt is

A)The amount by which tax revenues exceed government spending for a given year.
B)The accumulation of all annual deficit and surplus flows.
C)The amount by which government spending exceeds tax revenues for a given year.
D)A fairly risky asset that pays interest.

Question 54

An opportunity cost that occurs because of increased government spending is

A)Congressional disagreements.
B)The crowding in of public sector investment.
C)The crowding out of private sector output.
D)An increase in private sector investment.

Question 55

If the structural deficit is zero,

A)Federal tax revenue equals federal government expenditures at any equilibrium GDP.
B)If the economy goes above full employment,the cyclical deficit will get larger.
C)If the economy enters a recession,a budget surplus will result,ceteris paribus.
D)At full employment,the budget is balanceD.Because the structural portion of the deficit is equal to federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy,a value of zero would mean that if the economy were at full employment,the budget would be balanced.

Question 56

A decrease in private sector borrowing and spending caused by increased government borrowing is

A)Crowding in.
B)Crowding out.
C)Fiscal stimulus.
D)The GDP gap.

Question 57

If the budget deficit for each year is held to a constant nominal value during constant inflationary times,then the inflation-corrected or real value of the total debt would

A)Rise at a decreasing rate.
B)Rise at a constant rate.
C)Begin to fall,but then continually rise.
D)Initially rise but eventually would become negative.

Question 58

Crowding out is most likely to occur when the federal government

A)Runs a surplus and pays off part of the debt.
B)Has a balanced budget and refinances a portion of the debt that matures.
C)Runs a deficit and raises taxes to generate more revenue.
D)Runs a deficit and sells bonds to make up the difference.

Question 59

Crowding in is the result of

A)Falling interest rates.
B)Declining business confidence.
C)Rising unemployment.
D)Rising government borrowing.

Question 60

The opportunity cost of the debt is

A)The interest payments on the debt.
B)Less of an issue if the economy is below full employment since crowding out is less likely to occur.
C)Not an issue if the debt is financed internally.
D)The decrease in public sector output because of government borrowing.

Question 61

Federal agencies hold roughly _____ percent of all outstanding Treasury bonds.

A)50
B)66
C)30
D)16

Question 62

The national debt increased by nearly $2 trillion in the 1980s because of all of the following except

A)Recessions.
B)Tax cuts.
C)Defense spending.
D)College financing.

Question 63

In the 20th century,the ratio of the U.S.debt to GDP has

A)Risen in response to wars.
B)Been inversely related to the deficit to GDP ratio.
C)Fallen during wartime compared with prewar levels.
D)Fallen to its lowest levels during recessions or depressions.

Question 64

U.S.Treasury bonds owned by U.S.households,institutions,and government entities are referred to as

A)Debt servicing.
B)Debt refinancing.
C)External debt.
D)Internal debt.

Question 65

For the United States,from the 1980s to today,there has been an increase in both absolute size and relative size (relative to GDP)for the federal government in

A)The deficit and the debt.
B)The deficit,but not the debt.
C)The debt,but not the deficit.
D)Neither the deficit nor the debt.

Question 66

Internal ownership of the national debt occurs when U.S.Treasury bonds are purchased by all of the following except

A)Foreign countries that we trade with.
B)The Social Security Administration.
C)The Federal Reserve System.
D)Individual U.S.citizens.

Question 67

Which of the following best describes the federal budget during the 1990s?

A)The absolute size of the deficit fell.
B)The relative size of the deficit fell.
C)The absolute size of the debt grew to over $5 trillion.
D)There was a steady downward trend in the relative size of the deficit.

Question 68

Debt accumulation by the U.S.government in the 1980s:

A)Was small compared with earlier periods of history.
B)Exceeded the debt the country had accumulated over the preceding 200 years.
C)Was caused by war-related expenditures.
D)None of the choices are correct.

Question 69

Which of the following contributed to the increase in the national debt during the 1990s?

A)A decrease in military expenditures.
B)A period of inflation.
C)A decrease in discretionary spending.
D)The bailout of failed savings and loan associations.

Question 70

An obligation to make future payment is

A)Debt refinancing.
B)Debt service.
C)A liability.
D)An asset.

Question 71

The fiscal agent of the U.S.government is the

A)U.S.Treasury.
B)Federal Reserve System.
C)Securities and Exchange Commission.
D)Congress.

Question 72

The U.S.federal debt that accumulated between 1970 and 2010

A)Caused significant economic damage to the U.S.economy.
B)Is an asset and a liability for the U.S.economy.
C)Occurred at the expense of the foreign sector.
D)Occurred without an increase in the size of the government sector.

Question 73

A measure of the burden of continual deficit financing over time is the ratio of

A)The deficit to the GDP.
B)The debt to the GDP.
C)The deficit to the debt.
D)Tax revenues to the debt.

Question 74

The largest single holder of the U.S.national debt after the U.S.government is

A)The foreign sector.
B)The private sector.
C)U.S.businesses.
D)None of the choices are correct.

Question 75

When the Federal Reserve System buys bonds in the open market,the national debt

A)Must increase.
B)Must increase as long as the Fed buys only newly issued bonds.
C)Is not affected.
D)Will decrease because the Fed is a government agency.

Question 76

The national debt

A)Is paid off each fiscal year when the debt is refinanced.
B)Will never be paid off in any given year,but it will be entirely paid off when it is refinanced over a number of years.
C)Will be paid off when the budget is finally balanced.
D)Equals the dollar amount of outstanding U.S.Treasury bonds.

Question 77

Policies designed to pay off the national debt will result in:

A)A higher level of aggregate demand.
B)A redistribution of income but not wealth.
C)A smaller level of aggregate demand
D)Inflation.

Question 78

The U.S.private sector holds about _____ percent of outstanding U.S.Treasury bonds.

A)50
B)17
C)30
D)22

Question 79

The debt would cease to grow if

A)The federal government balanced its budget.
B)Federal expenditures were greater than federal receipts.
C)Interest rates fell.
D)None of the choices are correct.

Question 80

Which of the following owns the largest portion of the U.S.national debt?

A)Foreigners.
B)The federal government.
C)The private sector.
D)State and local governments.