Deck 4: Budget Analysis and Deficit Financing

Question 1

Which of the following is TRUE?

A) Both debt and deficit are flow variables.
B) Debt is a stock variable,while deficit is a flow variable.
C) Debt is a flow variable,while deficit is a stock variable.
D) Debt is measured in dollars,while deficits are measured in jobs lost.

Answer 1

Debt is a stock variable,while deficit is a flow variable.

Question 2

_____ accounting measures the deficit as the difference between current spending and current revenues,while _____ accounting takes into account the change in the value of the government's net asset holdings.

A) Short-term; long-term
B) Long-term; short-term
C) Cash; capital
D) Capital; cash

Answer 2

Cash; capital

Question 3

Which of the following must be TRUE?

A) If debt increased from one year to the next,there must have been a budget deficit.
B) If debt decreased from one year to the next,there must have been a budget surplus.
C) If debt increased from one year to the next,entitlement spending must have been increased.
D) If debt increased from one year to the next,discretionary spending must have been increased.

Answer 3

If debt increased from one year to the next,there must have been a budget deficit.

Question 4

Under which president did the United States experience the greatest increase in the deficit?

A) Jimmy Carter
B) Ronald Reagan
C) William Clinton
D) George W.Bush

Question 5

Suppose that the consumer price index rose by 3% from 2013 to 2014.Suppose that the price of a pizza increased by 5% during that time.Which of the following is TRUE?

A) The nominal price of pizza decreased.
B) The real price of pizza increased.
C) The real price of pizza did not change.
D) The real price of pizza decreased.

Question 6

When the 2001 tax cuts were passed,they were set to expire after:

A) 10 years,but the reduced tax rates for those making under $400,000 were permanently extended in 2012.
B) 2 years,but the reduced tax rates for those making under $400,000 were permanently extended in 2003.
C) 10 years,so tax rates reverted to 2001 levels in 2011.
D) 2 years,so tax rates reverted to 2001 levels in 2003.

Question 7

Suppose you paid $2.50 for a beer in 2004 and $3 exactly a year later.The price in 2004 is measured in _______ dollars; the price in 2005 is measured in _________ dollars.

A) real; real
B) nominal; real
C) real; nominal
D) nominal; nominal

Question 8

Suppose that the Consumer Price Index rises 3% from this year to next year.And suppose that the price of your favorite pizza rises 3% over that time as well.Which of the following is TRUE?

A) The nominal price of pizza has increased.
B) The real price of pizza has increased.
C) The real price of pizza has fallen.
D) The nominal price of pizza has remained the same.

Question 9

Which of the following is TRUE?

A) Neither the federal nor state governments have been able to control deficits for long periods.
B) Both the federal and state governments have been able to control deficits for long periods.
C) Both the federal and state governments have effective balanced budget requirements in place.
D) State governments have been able to control deficits for long periods while the federal government has not.

Question 10

The budget process distinguishes between:

A) entitlement spending and deficit spending.
B) discretionary spending and deficit spending.
C) surplus spending and deficit spending.
D) entitlement spending and discretionary spending.

Question 11

Suppose the government spends $3 trillion and collects $2 trillion in taxes this year.The ________ is equal to __________.

A) debt; $1 trillion
B) deficit; $1 trillion
C) debt; $2 trillion
D) deficit; $2 trillion

Question 12

The budget process sets which of the following?

A) entitlement spending
B) discretionary spending
C) debt levels
D) total spending

Question 13

A balanced budget requires that:

A) politicians vote for a budget in which spending exceeds revenues in order for the politicians to be eligible for reelection.
B) a deficit in that year be smaller than that of the previous year.
C) entitlement spending equals discretionary spending.
D) total spending equals total revenue.

Question 14

A cyclically adjusted budget deficit accounts for the effect of _____ on the budget deficit.

A) economic expansions only
B) politicians' attitudes regarding balanced budgets
C) recessions only
D) both economic expansions and recessions

Question 15

Complete the following sentence: Government __________ existed throughout the 1980s.

A) surpluses
B) deficits
C) balanced budget requirements
D) spending reductions

Question 16

The federal government's budget deficit ballooned to nearly 10% of GDP in 2009 and then:

A) remained about the same percentage in subsequent years.
B) continued to increase in subsequent years.
C) fell briefly before rising to nearly 15% in 2014.
D) began falling in subsequent years.

Question 17

Complete the following: _________ spending refers to funds for programs for which funding levels are automatically set by the number of eligible recipients,and Congress sets_________ spending by annual appropriations.

A) entitlement; discretionary
B) discretionary; entitlement
C) deficit; entitlement
D) deficit; discretionary

Question 18

Suppose that the consumer price index fell by 4% between this year and last year,and the price of a typical automobile fell by 3%.Which of the following is TRUE?

A) The nominal price of a car increased.
B) The real price of a car increased.
C) The real price of a car did not change.
D) The real price of a car decreased.

Question 19

Which of the following is TRUE about balanced budget requirements (BBRs)?

A) Only the federal government has a BBR.
B) BBRs that require that the governor/president submit a balanced budget or that the legislature pass a balanced budget are more effective than BBRs that require that the budget is balanced at the end of the year.
C) BBRs that require that the governor/president submit a balanced budget or that the legislature pass a balanced budget are less effective than BBRs that require that the budget is balanced at the end of the year.
D) BBRs have never been an effective method of reducing the size of the government's budget deficit.

Question 20

Under which president did the United States experience the greatest decline in the deficit?

A) Jimmy Carter
B) Ronald Reagan
C) William "Bill" Clinton
D) George W.Bush

Question 21

If the interest rate is 10%,what is the present discounted value of receiving $100 now,$140 next year,and $200 two years from now?

A) $440
B) $409.09
C) $386
D) $392.56

Question 22

Suppose the federal government has to borrow money because it has budget deficits.What is the mechanism through which this borrowing might crowd out private borrowing and capital accumulation?

A) interest rates
B) discretionary spending
C) defense spending
D) entitlement spending

Question 23

Suppose your state passes a law that adjusts spending,based on a preset formula,to offset cyclical changes in the economy.This is an example of:

A) static scoring of a policy.
B) dynamic scoring of a policy.
C) automatic stabilization.
D) discretionary stabilization.

Question 24

The U.S.government uses:

A) cash accounting for discretionary spending and capital accounting for defense spending.
B) cash accounting for discretionary spending and capital accounting for nondiscretionary spending.
C) only cash accounting.
D) only capital accounting.

Question 25

Which of the following must be TRUE if the price of college tuition has risen faster than the consumer price index in the past 20 years?

A) The real price of college tuition has risen.
B) The nominal price of college tuition has fallen.
C) The real price of college tuition has not changed.
D) The nominal price of college tuition has not changed.

Question 26

Using the generational accounting method as a measure of the long-run budget,which of the following statements is TRUE of people living in 1998 regarding net benefits from the government over their lifetime?

A) Both old and young males are projected to experience a net benefit.
B) Neither old nor young males are projected to experience a net benefit.
C) Old males are projected to experience a net benefit while young males are not.
D) Young males are projected to experience a net benefit while old males are not.

Question 27

In January 2001,the Congressional Budget Office (CBO)projected a budget surplus of nearly $6 trillion over the next 10 years,but it never materialized.According to the textbook,what does this erroneous projection imply?

A) Forecasting 5 or 10 years into the future is very difficult.
B) The CBO produces politically biased forecasts.
C) The forecasters at the CBO provide less accurate estimates than would forecasters in private practice.
D) Long-term forecasts are more accurate than short-term forecasts.

Question 28

If the interest rate is 10%,what is the present discounted value of receiving $100 next year?

A) $10
B) $90
C) $90.91
D) $110

Question 29

Cash accounting measures the deficit as the:

A) amount by which current spending exceeds current tax revenues.
B) amount by which current tax revenues exceed current spending.
C) increase in the value of the government's net asset holdings.
D) decrease in the value of the government's net asset holdings.

Question 30

Which of the following is TRUE?

A) Static scoring and dynamic scoring do not account for a policy's effects on behavior.
B) Static scoring and dynamic scoring both account for a policy's effects on behavior.
C) Static scoring accounts for a policy's effect on the size of the economy.
D) Dynamic scoring assumes that the size of the economy is fixed.

Question 31

Which of the following is TRUE?

A) When the economy is in recession,the cyclically adjusted budget deficit is lower than the reported deficit.
B) In periods of economic expansion,the cyclically adjusted budget deficit is lower than the reported deficit.
C) The reported budget deficit always equals the cyclically adjusted budget deficit with automatic stabilizers during recessions.
D) The reported budget deficit always equals the cyclically adjusted budget deficit with automatic stabilizers during expansions.

Question 32

If the interest rate is 10%,what is the present discounted value of receiving $100 two years from now?

A) $90
B) $90.91
C) $82.64
D) $111.11

Question 33

If the present discounted value of $200 received 3 years from now is $134.32,what is the interest rate?

A) 9.6%
B) 10%
C) 12%
D) 14%

Question 34

Which of the following is TRUE?

A) Cash accounting is easier to implement in practice than is capital accounting.
B) Capital accounting is easier to implement in practice than is cash accounting.
C) Spending $1 billion on highways would change the capital account balance but not the cash account balance.
D) Spending $1 billion on unemployment benefits would change the capital account balance but not the cash account balance.

Question 35

Suppose cutting taxes both reduces the percentage of income that is taxed and increases the size of taxable incomes.Which scoring method takes both effects into account?

A) neither static nor dynamic scoring
B) dynamic scoring but not static scoring
C) static scoring but not dynamic scoring
D) capital scoring but not cash scoring

Question 36

According to the approach developed by Gokhale and Smetters in 2003,the discounted value of the long-run fiscal imbalance of Social Security and Medicare programs,as of 2012,was approximately:

A) $6 trillion.
B) $40 trillion.
C) $63 trillion.
D) $106 trillion.

Question 37

Which of the following occurs when the generational accounting measure is used?

A) Males born in 1998 are projected to pay less in taxes than they will receive in benefits from the government.
B) Males born in 1998 are projected to pay more in taxes than they will receive in benefits from the government.
C) Males over age 60 are projected to pay more in taxes than they will receive in benefits from the government over their lifetime.
D) This measure does not attempt to project future tax liabilities.

Question 38

If debt is a nominal obligation to borrowers:

A) debt is irrelevant for government.
B) inflation decreases the burden of the national debt.
C) inflation increases the burden of the national debt.
D) inflation has no effect on the burden of the national debt.

Question 39

Which one of the following factors is a concern about long-run imbalance measures?

A) The measures are politically motivated; objective forecasters typically don't acknowledge them.
B) The measures depend,critically,on assumptions about things like the future growth rates of costs and incomes.
C) The measures assume that government policy will change over time.
D) The measures do not take into account the political motivations of decision makers.

Question 40

When the price level rises,the:

A) real deficit increases.
B) real deficit falls.
C) nation forgoes more consumption to pay the debt.
D) real burden of the deficit is not affected.

Question 41

Some have argued in favor of reducing taxes on repatriated earnings that companies operating in the United States have made in other countries.Such a tax break could lead to a sharp increase in the amount of repatriated earnings and raise tax revenues.If such an increase were temporary,what would be the effect on the real budget deficit for the current year? What would be the effect on the structural deficit? Explain.

Question 42

Suppose the economy is in a recession and that revenues for the current year are equal to expenditures.
(a)What is the budget deficit in this case?
(b)How would a cyclically adjusted budget deficit be different? Explain.

Question 43

Suppose that a state legislature votes to increase spending because of an unexpected recession.This is an example of which of the following?

A) discretionary stabilization
B) dynamic scoring of a policy
C) capital accounting
D) automatic stabilization

Question 44

Compare and contrast static scoring of the budget with dynamic scoring when it comes to evaluating the effect of a policy change.

Question 45

The difference between the present discounted value (PDV)of projected expenditures each year in the future and the PDV of projected revenues each year in the future is the PDV of the government's:

A) generational imbalance.
B) structural deficit.
C) cyclically adjusted deficit.
D) fiscal imbalance.

Question 46

Suppose that the federal government is considering two alternative spending bills.The first would purchase land for $80 billion to protect an endangered species,while the second would use the $80 billion to build new highways.How would these spending bills affect the cash and capital accounts of the federal government?

Question 47

Explain the views of conservatives and liberals regarding the causes of persistent federal budget deficits.

Question 48

Explain the recent proposals of an explicit balanced budget amendment in relation to PAYGO.What are the views of supporters and opponents of these proposals?