Question 1

One measure of "ability to pay" the national debt is the debt to

Accepted Answer

A)  GDP ratio. 
B)  tax ratio. 
C)  spending ratio. 
D)  investment ratio.

Question 2

The argument that the national debt imposes a burden on future generations becomes more compelling as

Accepted Answer

A)  the percentage of the national debt held by foreigners rises. 
B)  tax rates rise. 
C)  interest rates fall. 
D)  debt service payments (interest) rise.

Question 3

A chart of the ratio of national debt to GDP from 1915 to 2014 would show

Accepted Answer

A)  significant increases from 1945 to 1975. 
B)  significant increases during World Wars I and II. 
C)  a larger value in 1975 compared to 1945. 
D)  significant increases from 1995 to 2003.

Question 4

The U.S. national debt at the end of fiscal year 2014 was almost

Accepted Answer

A)  $13.5 trillion. 
B)  $9.0 trillion. 
C)  $18 trillion. 
D)  $1.3 trillion.

Question 5

Why might the Fed decide to monetize the deficit?

Accepted Answer

A)  To keep inflation low 
B)  To reduce the structural deficit 
C)  To reduce the budget deficit 
D)  To keep interest rates low

Question 6

No nation needs default on debts that call for repayment in its own currency. However, Russia astounded the financial world in 1998 by choosing to default on its

Accepted Answer

A)  dollar denominated debt. 
B)  ruble denominated debt. 
C)  British sterling pounds denominated debt. 
D)  none of these.

Question 7

Between 2009 and 2013,

Accepted Answer

A)  both the actual and the structural deficit fell substantially. 
B)  both the actual and the structural deficit rose substantially. 
C)  the actual deficit rose, while the structural deficit fell substantially. 
D)  the structural deficit rose, while the actual deficit fell substantially.

Question 8

Crowding out can best be defined as

Accepted Answer

A)  higher interest rates caused by restrictive monetary policy, which reduces investment. 
B)  higher interest rates caused by restrictive monetary policy, which increases saving and reduces consumption spending. 
C)  government budget deficits causing a drop in private borrowing because of higher interest rates. 
D)  government budget deficits causing a drop in interest rates, which reduces private saving.

Question 9

Crowding out occurs when deficit spending by the government forces private investment spending to contract.

Accepted Answer

A) True 
 B)False

Question 10

The Federal Reserve may choose to monetize the debt in order to

Accepted Answer

A)  reduce the burden of the national debt. 
B)  shift the supply curve of money outward. 
C)  shift the demand curve for money inward. 
D)  reduce the volume of reserves in commercial banks.

Question 11

If the U.S. government decides to eliminate a budget surplus by reducing taxes, the most likely effect would be

Accepted Answer

A)  falling prices. 
B)  a reduction in the trade deficit. 
C)  an increase in unemployment. 
D)  upward pressure on prices.

Question 12

Surge in government demand (G) discourages some private demand (I) and this is a major reason as to why the oversimplified formula: 1/(1-MPC) ____________ the size of the multiplier.

Accepted Answer

A)  exaggerates 
B)  underestimates 
C)  has no impact on 
D)  none of these

Question 13

Why does the government not have to repay debt, as do private individuals?

Accepted Answer

A)  Because the government can ignore creditors and refuse payment. 
B)  Because the government, as a dictatorship, is unresponsive to demands for repayment. 
C)  Because the government has no debt; it owes it to itself. 
D)  Because the government does not have a finite life, as do individuals.

Question 14

The Troubled Asset Relief Program (TARP) totaled ____ and the fiscal stimulus package of 2009 totaled ____.

Accepted Answer

A)  $1.4 trillion; $800 billion 
B)  $1.4 trillion; $700 billion 
C)  $700 billion; $800 billion 
D)  $700 billion; $1.4 trillion

Question 15

The crowding-in effect results from

Accepted Answer

A)  a low MPS. 
B)  induced investment. 
C)  induced consumption. 
D)  rising interest rates.

Question 16

The structural deficit is equal to expenditures

Accepted Answer

A)  plus transfers less taxes for the fiscal year in government statistics. 
B)  less taxes at some hypothetical high employment level. 
C)  plus transfers less taxes at some hypothetical high employment level. 
D)  less transfers for the fiscal year in government statistics.

Question 17

If the economy suffers a recession for reasons unrelated to fiscal policy, the deficit should rise and

Accepted Answer

A)  inflation should fall. 
B)  interest rates should fall. 
C)  real GDP should fall. 
D)  all of the above are correct.

Question 18

Suppose that the economy is currently at full employment. All other things being equal, if central bank implements contractionary policy, then the appropriate fiscal policy is to

Accepted Answer

A)  increase taxes. 
B)  reduce government spending. 
C)  balance the budget. 
D)  increase a budget deficit.

Question 19

If the inflation rate falls, what will happen to the budget deficit?

Accepted Answer

A)  It will rise, because government spending will rise. 
B)  It will rise, because interest payments will rise. 
C)  It will fall, because tax receipts will increase. 
D)  It will fall, because interest payments will fall.

Question 20

Economists who argue in favor of rapid deficit reduction claim that deficit reduction will

Accepted Answer

A)  reduce crowding in, reduce interest rates, and increase AS. 
B)  stimulate AD and productivity. 
C)  trigger crowding in, increase investment, and increase AS. 
D)  reduce crowding out, increase investment, and increase AS.

Exam 32: Budget Deficits in the Short and Long Run