Deck 18: The Government and the Macroeconomy

Question 1

The government debt is:

A) the total accumulation of deficits in the current period
B) the outstanding stock of bonds that have been issued in the past
C) the annual difference between government spending and tax revenues
D) equal to total tax receipts
E) None of these answers are correct.

Answer 1

B

Question 2

In 2005, the debt-to-GDP ratio in the United States was about ________ percent, but by 2011 it was about ________ percent.

A) 37; 67
B) 120; 67
C) 24; 53
D) 5; 43
E) 0; 12

Answer 2

A

Question 3

In 2011, the federal government's budget deficit was about:

A) 8.6 percent of GDP
B) 100 percent of GDP
C) 21 percent of household consumption
D) 150 percent of nonresidential private investment
E) 0

Answer 3

A

Question 4

Refer to the following figure when answering
Figure 18.1: Federal Government Receipts and Outlays, 1990-2012 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

-Consider Figure 18.1. The federal government ran a surplus during the period:

A) 1990-1993
B) 1993-1997
C) 1998-2002
D) 2002-2006
E) Not enough information is given.

Question 5

The budget balance is the:

A) level of firm investment
B) difference between exports and imports
C) difference between household spending and income
D) difference between tax revenue and government spending
E) difference between movements of assets across countries

Question 6

Refer to the following figure when answering
Figure 18.2: Government Outlays and Receipts as a Percentage of GDP, 1947-2012

-Consider Figure 18.2. The only period(s) in which the federal government ran a budget surplus since 1970 was/were:

A) 1998-2002
B) 1970
C) 1973-2001
D) None of these answers are correct.
E) All of these answers are correct.

Question 7

The federal government usually finances its budget deficit by:

A) raising taxes
B) selling its real assets
C) selling government bonds
D) borrowing from commercial banks
E) borrowing from foreign governments

Question 8

The ratio of all levels of government spending to GDP in the United States is about:

A) 10 percent
B) 50 percent
C) 20 percent
D) 70 percent
E) 40 percent

Question 9

Since 1940, the largest gross federal debt-to-GDP ratio occurred during ________, when it reached about ________.

A) 9/11; 90 percent
B) the oil crisis; 110 percent
C) the Volcker recession; 50 percent
D) World War II; 108 percent
E) the Vietnam War; 65 percent

Question 10

Refer to the following figure when answering
Figure 18.2: Government Outlays and Receipts as a Percentage of GDP, 1947-2012

-Consider Figure 18.2. What was the cause of the huge budget deficit beginning in 2007?

A) the oil crisis
B) the Great Recession
C) President Reagan's defense expenditures
D) the second Gulf War
E) the Volcker recession

Question 11

The federal government's largest source of revenue in 2011 was:

A) Medicare taxes
B) social security taxes
C) personal income taxes
D) corporate income taxes
E) natural resource extraction royalties

Question 12

Refer to the following figure when answering
Figure 18.2: Government Outlays and Receipts as a Percentage of GDP, 1947-2012

-Consider Figure 18.2. What was the cause of the huge budget deficit beginning in 1981?

A) the oil crisis
B) the Great Recession
C) President Reagan's defense expenditures and tax cuts
D) the first Gulf War
E) the Volcker recession

Question 13

In 2011, the debt-to-GDP ratio in the United States was about:

A) 24 percent
B) 120 percent
C) 67 percent
D) 53 percent
E) None of these answers are correct.

Question 14

The federal government's largest expenditure in 2011 was:

A) net interest payments
B) the environment
C) social security
D) defense
E) health

Question 15

Refer to the following figure when answering
Figure 18.2: Government Outlays and Receipts as a Percentage of GDP, 1947-2012

-Consider Figure 18.2. Which of the following were periods when the federal government ran a budget surplus?

A) 1947-1949
B) 1998-2002
C) 1955-1958
D) All of these answers are correct.
E) None of these answers are correct.

Question 16

Refer to the following figure when answering
Figure 18.1: Federal Government Receipts and Outlays, 1990-2012 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

-Consider Figure 18.1. The federal government ran a deficit at all points during the period:

A) 1990-1997
B) 1990-1999
C) 2000-2006
D) 1998-2002
E) Not enough information is given.

Question 17

In 2011, the ratio of federal government spending to GDP in the United States was about:

A) 61 percent
B) 43 percent
C) 24 percent
D) 10 percent
E) 35 percent

Question 18

Government expenditures include:

A) state government spending
B) federal government spending
C) local government spending
D) All of these answers are correct.
E) None of these answers are correct.

Question 19

The current U.S. debt held by the public to GDP ratio is about:

A) 100 percent
B) 67 percent
C) 37 percent
D) 50 percent
E) None of these answers are correct.

Question 20

The difference between the gross federal debt and the debt by the public is debt held by:

A) other government entities
B) the social security administration
C) foreign central banks
D) All of these answers are correct.
E) None of these answers are correct.

Question 21

Consider the government's intertemporal budget constraint: $\underbrace { G _ { 1 } + \frac { G _ { 2 } } { ( 1 + i ) } } _ { A } + \underbrace { ( 1 + i ) B _ { 1 } } _ { B } = \underbrace { T _ { 1 } + \frac { T _ { 2 } } { ( 1 + i ) } } _ { C }$ .
Term A is the ________, and term B is the ________.

A) present discounted value of government spending; initial debt
B) total annual spending; deficit
C) initial period's spending; initial debt
D) present value of government spending and taxes; present value of government spending
E) None of these answers are correct.

Question 22

In the post-World War II U.S. economy, the rapid expansion of federal government debt began during the:

A) oil embargo
B) Kennedy administration
C) Reagan administration
D) collapse of the Bretton Woods system
E) Clinton administration

Question 23

U.S. government debt that is not held by the public often is not counted in economic analyses because it is:

A) paid out to U.S. citizens
B) debt to a very large institution
C) an asset transfer from one branch of government to another
D) part of the social security system
E) rolled over into new debt

Question 24

Which of the following represents the government's budget constraint?

A) $G _ { t } = i Y _ { t }$
B) $G _ { t } + T r _ { t } + i B _ { t } = T _ { t }$
C) $G _ { t } + T r _ { t } + i B _ { t } = Y _ { t }$
D) $G _ { t } = T _ { t } + T r _ { t } + i B _ { t } + \Delta B _ { t } + \Delta M _ { t }$
E) $G _ { t } + T r _ { t } + i B _ { t } = T _ { t } + \Delta B _ { t + 1 } + \Delta M _ { t + 1 }$

Question 25

The country with the largest annual government spending-to-GDP ratio is:

A) Japan
B) South Korea
C) the United States
D) the United Kingdom
E) Sweden

Question 26

In 2008, the ________ held about ________ of U.S. federal government debt.

A) Fed; $11 trillion
B) Peoples Bank of China; $3 trillion
C) social security trust fund; $2.2 trillion
D) largest investment banks; $100 billion
E) European Central Bank; $250 billion

Question 27

The government's intertemporal budget constraint is a simple two-period case in which:

A) $G _ { 1 } + \frac { G _ { 2 } } { ( 1 + i ) } + ( 1 + i ) B _ { 1 } = 0$
B) $G _ { 1 } + G _ { 2 } + ( 1 + i ) B _ { 1 } = T _ { 1 } + T _ { 2 }$
C) $G _ { 1 } + \frac { G _ { 2 } } { ( 1 + i ) } + ( 1 + i ) B _ { 1 } = T _ { 1 } + \frac { T _ { 2 } } { ( 1 + i ) }$
D) $\frac { G _ { 1 } } { ( 1 + i ) } + G _ { 2 } + ( 1 + i ) B _ { 1 } = T _ { 1 } + \frac { T _ { 2 } } { ( 1 + i ) }$
E) $G _ { 1 } + G _ { 2 } = T _ { 1 } + T _ { 2 }$

Question 28

The source(s) of funds for the government is/are:

A) sales of real assets
B) loans from commercial banks
C) gold
D) All of these answers are correct.
E) None of these answers are correct.

Question 29

If we assume that $T r _ { t } = \Delta M _ { t } = 0$ , which of the following represents the government's budget constraint?

A) $G _ { t } + i B _ { t } = T _ { t } + \Delta B _ { t }$
B) $B _ { t } + 1 = ( 1 + i ) B _ { t } + G _ { t } - T _ { t }$
C) $G _ { t } = T r _ { t }$
D) $G _ { t } = T _ { t }$
E) $B _ { t + 1 } = ( 1 + i ) B _ { t } + G _ { t }$

Question 30

Since 1970, the federal government budget has been in surplus only during the:

A) oil embargo
B) Kennedy administration
C) Reagan administration
D) collapse of the Bretton Woods system
E) Clinton administration

Question 31

In the euro area, the government spending-to-GDP is about ________ percent:

A) 65
B) 5
C) 20
D) 100
E) 50

Question 32

The source(s) of funds for the government is/are:

A) tax revenues
B) new borrowing
C) printing money
D) All of these answers are correct.
E) None of these answers are correct.

Question 33

The economic meaning of the intertemporal budget constraint is that:

A) the government's budget never has to balance
B) the government's budget must balance period by period
C) the present discounted value of the government's budget must balance
D) the government can always push its debt on future generations
E) every generation faces the same tax schedule

Question 34

The difference between the primary and total deficits is that the primary deficit:

A) is always balanced
B) includes spending on interest
C) excludes spending on interest
D) is never balanced
E) equals zero

Question 35

The country with the smallest annual government spending-to-GDP ratio is:

A) France
B) the United States
C) the United Kingdom
D) South Korea
E) Japan

Question 36

Which of the following countries has the largest government spending-to-GDP ratio?

A) France
B) the United States
C) Sweden
D) the United Kingdom
E) Germany

Question 37

The government's intertemporal budget constraint assumes that the budget is:

A) never balanced
B) balanced in the first period
C) balanced in the last period
D) always balanced
E) None of these answers are correct.

Question 38

$G _ { t } - T _ { t }$ is called the ________, and $G _ { t } + i B _ { t } - T _ { t }$
Is called the ________.

A) total deficit; primary deficit
B) primary deficit; total deficit
C) primary deficit; secondary deficit
D) state and local deficit; federal deficit
E) budget surplus; government debt

Question 39

Which of the following countries has negative government debt?

A) Mexico
B) the United States
C) Norway
D) Russia
E) Germany

Question 40

The government uses funds to:

A) make transfer payments
B) buy goods and services
C) pay interest on outstanding debt
D) All of these answers are correct.
E) None of these answers are correct.

Question 41

If current generations are depleting nonrenewable resources, they must compensate future generations by:

A) investing in capital
B) investing in education
C) investing in research
D) All of these answers are correct.
E) None of these answers are correct.

Question 42

Which of the following countries has defaulted on its debt?

A) France
B) Argentina
C) the United Kingdom
D) Belgium
E) China

Question 43

Which of the following should economic policymakers consider to be associated with large deficits and a large debt-to-GDP ratio?

A) the importance of economic growth
B) the possibility of high inflation or default
C) intergenerational equity
D) the extent to which deficits crowd out private investment
E) All of these answers are correct.

Question 44

An explanation of why governments are willing to burden future generations with debt to finance a war today is:

A) only present generations enjoy peace
B) future generations will enjoy peace and must pay nothing
C) future generations will enjoy peace and must pay something
D) future generations will never enjoy peace but must pay for current generations to enjoy it
E) current generations are more important to the government than future generations

Question 45

Which of the following is NOT an issue of large deficits and a large debt-to-GDP ratio for the economy?

A) intergenerational equity
B) the importance of economic growth
C) the possibility of high inflation or default
D) the impacts on the overall money supply
E) the extent to which deficits crowd out private investment

Question 46

What was Japan's debt-to-GDP in 2012?

A) 76 percent
B) 65 percent
C) 100 percent
D) 35 percent
E) 130 percent

Question 47

Under which condition can the government continue to accumulate debt?

A) if it issues more bonds
B) if it promises to pay the debt back
C) if the economy grows faster than the debt
D) if it appropriates funds from another economy
E) None of these answers are correct.

Question 48

An implication of the intertemporal budget constraint is that:

A) the government can borrow only as much as it can credibly pay back
B) the government can borrow as much as it wants
C) the government must always have a balanced budget
D) the government must balance its budget over the business cycle
E) all generations pay the same amount of taxes

Question 49

Which of the following might worry prospective lenders to a government?

A) high debt relative to income
B) a high debt-to-GDP ratio
C) a violent coup in the government
D) All of these answers are correct.
E) None of these answers are correct.

Question 50

If current generations are depleting nonrenewable resources, they must compensate future generations by:

A) saving gold
B) printing more money
C) investing in capital
D) buying more military equipment
E) increasing the stock of renewable resources

Question 51

If a government has a difficult time raising funds by borrowing, it ________, which generates ________.

A) must print money; inflation
B) must print money; high real interest rates
C) raises taxes; inflation
D) raises taxes; unemployment
E) All of these answers are correct.

Question 52

The idea that present generations benefit from borrowing what future generations must pay is called:

A) the budget deficit
B) intertemporal substitution
C) the intertemporal budget constraint
D) generational accounting
E) discretionary spending

Question 53

The basic point of generational accounting is that high and rising debt-GDP ratios imply:

A) higher interest rates in the future
B) lower tax rates on future generations
C) higher tax rates on future generations
D) reduced government expenditures in the future
E) rising government expenditures in the future

Question 54

Given what you know about the sizes of economies, which of the following countries probably would find it impossible to borrow more than $500 billion?

A) France
B) Mongolia
C) Germany
D) the United States
E) Japan

Question 55

In the intertemporal budget constraint, the term $( 1 + i ) B _ { 1 }$ is called the:

A) total debt
B) initial debt
C) government deficit
D) government surplus
E) None of these answers are correct.

Question 56

In the past decade, which country has restructured its debt?

A) Greece
B) Brazil
C) the United Kingdom
D) Spain
E) India

Question 57

If investors begin to doubt the ability to finance spending with ________, markets will demand ________.

A) borrowing; more bonds
B) only taxes; higher interest rates
C) taxes and borrowing; higher interest rates
D) borrowing; less government spending
E) taxes and borrowing; lower interest rates

Question 58

In the language of generational accounting, by issuing bonds to finance a war in the present:

A) pay no burden to enjoy peace
B) future generations are paying for the peace they enjoy
C) past and present generations pay for the peace
D) only past generations pay for peace
E) None of these answers are correct.

Question 59

Which of the following is an indicator of whether a country can borrow?

A) the size of the tax base
B) the size of the economy
C) the reputation of the head of government
D) the size of the military
E) All of these answers are correct.

Question 60

Given what you know about the sizes of economies, which of the following countries probably would find it impossible to borrow more than $1 trillion?

A) Egypt
B) Vietnam
C) Russia
D) Croatia
E) All of these answers are correct.

Question 61

According to the Congressional Budget Office report "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075," by the year 2075, spending on entitlement programs will be about:

A) 19 percent of GDP
B) 21 percent of household expenditures
C) 100 percent of tax revenues
D) 21 percent of GDP
E) zero

Question 62

When ________ hold(s), if the present value of government is held constant, budget deficits will not crowd out investment.

A) adaptive expectations
B) generational accounting
C) crowding in
D) lower interest rates
E) None of these answers are correct.

Question 63

If domestic saving is less than domestic investment, then investment can be financed by:

A) the budget deficit
B) foreign saving
C) higher interest rates
D) new savings instruments
E) higher rates of inflation

Question 64

The national income identity can be rearranged to show that ________ equals ________.

A) Private saving + Government saving + Foreign saving; Investment
B) Private saving - Government saving + Investment; the budget deficit
C) Private saving - Government saving - Foreign saving; Investment
D) Private saving; Investment
E) Private saving + Government saving + Foreign saving; tax revenues

Question 65

If domestic saving is less than domestic investment, then investment is financed by:

A) an inflation tax
B) nothing-it cannot be done
C) higher interest rates
D) foreign saving
E) printing more money

Question 66

Income minus taxes is often called:

A) government expenditures
B) consumption
C) investment
D) gross income
E) None of these answers are correct.

Question 67

The difference between imports and exports is:

A) domestic saving
B) the trade balance
C) foreign saving
D) the budget deficit
E) the real interest rate

Question 68

According to the Congressional Budget Office report "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075," government revenues are projected to ________ by the year ________, assuming current federal government spending patterns.

A) stabilize; 2075
B) stabilize; 2020
C) begin growing faster; 2020
D) begin growing slower; 2010
E) be zero; 2075

Question 69

Income minus taxes is often called:

A) investment
B) consumption
C) disposable income
D) gross income
E) None of these answers are correct.

Question 70

According to the Congressional Budget Office report "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075," Medicare, Medicaid, and social security will be about ________ percent of GDP in 2030.

A) 8
B) 15
C) 6
D) 0
E) 100

Question 71

Which country has the highest share of medical expenses to GDP?

A) Japan
B) Germany
C) the United States
D) France
E) the United Kingdom

Question 72

According to the Congressional Budget Office report "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075," the main culprit(s) for the increase in federal government spending to about 40 percent of GDP in 2075 is/are:

A) Medicare
B) Medicaid
C) social security
D) All of these answers are correct.
E) None of these answers are correct.

Question 73

________ is/are what may happen when the central government needs to borrow to finance its deficit to the detriment of private firms.

A) Lower interest rates
B) Crowding out
C) Higher rates of inflation
D) A lower marginal product of capital
E) More unemployment

Question 74

The CBO forecasts that the number of workers per retiree in the social security program will ________ from ________ to ________ in the coming decades.

A) fall; 7; 2
B) stay about the same; 3; 3
C) rise; 4; 12
D) fall; 3.3; 2
E) rise; 2; 3.1

Question 75

According to the Congressional Budget Office report "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075," the share of government spending in GDP will ________, assuming current federal government spending patterns.

A) climb to 40 percent by 2075
B) climb to 40 percent by 2015
C) climb to 100 percent in 2075
D) fall to 0 percent in 2075
E) not change between now and 2075

Question 76

According to the Congressional Budget Office report "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075," the share of federal government spending in GDP will climb to 40 percent by 2075, assuming:

A) household consumption falls
B) government spending rises sharply
C) government spending falls slightly
D) current policies stay in place
E) the entire "baby boomer" generation retires in the same year

Question 77

Which of the following is/are possible explanation(s) for rising health care expenditures?

A) the rising cost of health insurance
B) the aging of the population
C) anecdotes associated with doctors who induce patients to spend more on medical care than they really would prefer
D) the use of new and expensive medical technology
E) All of these answers are correct.

Question 78

If the government increases its budget deficit, ________ is/are ameliorated if the economy has access to ________.

A) crowding out; foreign savings
B) crowding out; a money printing press
C) inflation; household savings
D) unemployment; the tax structure
E) lower interest rates; foreign savings

Question 79

The system used for the social security program is called:

A) a Roth IRA
B) a 401(k)
C) a mutual fund
D) pay-as-you-go
E) fully funded

Question 80

________ imply/implies that, holding the present value of government spending constant, budget deficits will not crowd out investment.

A) Crowding in
B) Generational accounting
C) Ricardian equivalence
D) Lower interest rates
E) Lower taxes