Deck 32: Budget Deficits in the Short and Long Run

Question 1

Budget deficit is the amount by which the government's expenditures exceed its receipts during a specified period of time, usually a year.

Answer 1

True

Question 2

Composition of aggregate demand is a major determinant of the economy's long-run economic growth rate.

Answer 2

True

Question 3

Budget deficits are even more inflationary if they are monetized.

Answer 3

True

Question 4

The federal budget deficit in 2009 was more than eight times larger than the deficit in 2007.

Question 5

Smaller budget deficits and looser monetary policy lead to a larger investment share and faster growth.

Question 6

A large national debt can lead to a nation to bequeath less capital to future generations.

Question 7

Budget surpluses can stimulate capital formation and spur economic growth.

Question 8

Monetary policy is not the only type of policy that affects interest rates.

Question 9

Lower deficits should lead to higher levels of private investment spending.

Question 10

The official fiscal year budget deficits disappeared from 1998 to 2001.

Question 11

Budget surplus is the amount by which the government's receipts exceed expenditures during a specified period of time, usually a year.

Question 12

As GDP falls, automatic stabilizers run the federal budget in a deficit direction.

Question 13

Increases in government spending or tax cuts normally push interest rates up.

Question 14

Restrictive fiscal policies pull interest rates down.

Question 15

There is a fundamental difference between nations that borrow in their own currency (such as the United States) and nations that borrow in some other currency (often the U.S. dollar).

Question 16

Until about 1983, almost all of U.S. national debt stemmed from financing wars or from the loss of tax revenues that accompany recessions.

Question 17

The structural deficit can be used to estimate the thrust of current fiscal policy.

Question 18

Large deficits can retard economic growth.

Question 19

The structural deficit is determined by established expenditure-transfer policies and tax rates and is independent of the current level of GDP.

Question 20

Expansionary fiscal policy normally raises interest rates.

Question 21

It is most likely that the federal government will never actually pay off the national debt.

Question 22

Larger budget deficits and tighter money tend to produce higher interest rates, a smaller share of investment in GDP, and slower growth.

Question 23

If national debt is owned by domestic citizens, future interest payments just transfer funds from one group of Americans to another.

Question 24

National debt is the federal government's total indebtedness at a moment in time.

Question 25

Deficit spending boosts aggregate demand.

Question 26

National debt is the result of previous budget deficits.

Question 27

Falling GDP leads to higher transfer payments and lower tax receipts.

Question 28

Structural budget surplus is the hypothetical surplus we would have under current fiscal policies if the economy were operating near full employment.

Question 29

In the short run, and especially when unemployment is high, crowding in is the stronger force. The short-run effects of government's financial rescue program and fiscal stimulus package helped the economy increase aggregate demand curing the Great Recession.

Question 30

Structural budget deficit is the hypothetical deficit we would have under current fiscal policies if the economy were operating near full employment.

Question 31

Deficit is the difference between government expenditures, which are either purchases or transfer payments and tax receipts.

Question 32

The portion of national debt owned by foreigners does constitute a burden on the nation as a whole.

Question 33

In 2009, the Social Security System ran a surplus of approximately $137 billion.

Question 34

Deficit rises in a recession and falls in a boom, even with no change in fiscal policy.

Question 35

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

Question 36

Monetizing the deficit contributes to the inflationary pressures that are already present in the economy.

Question 37

In the long run, the economy will be near full employment, and crowding out is the stronger force.

Question 38

The central bank is said to monetize the deficit when it purchases bonds issued by the government.

Question 39

Crowding in occurs when government spending, by raising Real GDP, induces increases in private investment spending.

Question 40

Contractionary fiscal policies used to reduce the deficit in the 1990s did not hurt the economy because fiscal and monetary policies were well coordinated at that time.

Question 41

The American national debt is an obligation to pay U.S.$.

Question 42

Which of the following individuals would be most likely to support a balanced budget amendment to the constitution?

A) "Christmas is when children ask Santa Claus for things and their parents pay for them. Deficits is when adults ask government for things and their children pay for them." -Richard Lamm
B) "In a boom, inflation can be caused by allowing unlimited credit to support excited enthusiasm of business speculators. But in a slump government expenditure is the only sure means of obtaining quickly a rising output." -J.M. Keynes
C) "If we face a recession we should not lay off employees. Employees are not guilty; why should they suffer?" -Akio Morita
D) "Underbalancing the budget during a depression is not primarily a deliberate policy but a practical necessity." -Gunnar Myrdal

Question 43

The structural deficit does not depend on the state of the economy.

Question 44

Restrictive fiscal policies

A) pull interest rates down.
B) push interest rates up.
C) have no impact on interest rates.
D) none of these.

Question 45

No nation needs default on debts that call for repayment in its own currency.

Question 46

The purpose of fiscal policy should be to

A) balance the budget to be fiscally responsible.
B) balance aggregate supply and aggregate demand.
C) keep taxes low to keep voters happy.
D) minimize government spending to avoid wasting money.

Question 47

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

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

Question 48

If the economy is in an inflationary gap and the government attempts to balance the budget, the effect will be to

A) counteract inflation.
B) reduce the trade deficit.
C) continue inflationary pressures.
D) increase unemployment.

Question 49

U.S. national debt at the end of the fiscal year 2018 was

A) over $21 trillion.
B) over $31 trillion.
C) $45 trillion.
D) $50 trillion.

Question 50

Increases in government spending or tax cuts normally

A) pushes interest rates up.
B) pulls interest rates down.
C) has no impact on interest rates.
D) none of these.

Question 51

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

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

Question 52

If the U.S. government decided to pay off the national debt by creating money, what would be the most likely effect?

A) A substantial reduction in real GDP
B) A deflationary collapse
C) Rapid inflation
D) An increase in the trade surplus

Question 53

Which of the following is expected to increase aggregate demand in the short run?

A) Deficit budget
B) Surplus budget
C) Zero based budget
D) Balanced budget

Question 54

National debt is also known as

A) private debt.
B) public debt.
C) private saving.
D) public saving.

Question 55

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

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

Question 56

In 2010, which of the following was true regarding the extremely large deficits that the United States recently encountered?

A) Most politicians and economists argued that the deficit had to be reduced.
B) Most politicians argued that the deficit had to be reduced but economists cautioned against this course of action.
C) Most economists argued that the deficit had to be reduced but politicians cautioned against this course of action.
D) Both politicians and economist cautioned against deficit reduction.

Question 57

If the economy is in a recessionary gap and the government attempts to balance the budget, the effect will be to

A) counteract the recession.
B) worsen and prolong the recession.
C) end the recession sooner.
D) increase the level of real GDP.

Question 58

Japanese Prime Minister Ryutaro Hashimoto was called the "Herbert Hoover of Japan" because he

A) looked like a very distinguished politician.
B) advocated vast public works to combat unemployment.
C) advocated budget deficit reduction in the midst of a recession.
D) advocated easier monetary policy and lower interest rates to combat recession.

Question 59

If a larger fraction of GDP is devoted to ___________, nation's capital stock will grow faster and the aggregate supply curve will shift more quickly to the right, accelerating growth.

A) investments
B) consumption
C) trade
D) none of these

Question 60

Most economists agree that the focus of fiscal policy is to

A) plan the economy.
B) balance aggregate demand and aggregate supply.
C) balance the federal budget.
D) balance environmental needs and resources.

Question 61

The budget deficit

A) is the value of the government's indebtedness at a moment in time.
B) was $13.5 trillion in fiscal 2014.
C) is the amount by which the government's expenditures exceed receipts during a specific time period.
D) all of the above are correct.

Question 62

A budget surplus exists when

A) tax receipts
B) tax receipts > government expenditures + transfers.
C) government expenditures − transfers > tax receipts.
D) government expenditures > transfers + tax receipts.

Question 63

The national debt is defined as the total

A) amount that U.S. citizens owe to foreigners.
B) value that U.S. citizens borrow from foreigners during any time period.
C) value of government's indebtedness at any moment in time.
D) amount by which government's expenditures exceed receipts during any time period.

Question 64

Until the 1980s, most of the national debt was

A) owned by foreigners.
B) acquired either during wars, especially World War II, or during recessions.
C) owned by banks.
D) financed by printing money.

Question 65

The national debt is the

A) result of previous budget deficits.
B) result of rising interest rates.
C) result of previous budget surpluses.
D) result of efficient balancing.

Question 66

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

A) a continuous decline.
B) sharp increases from 1945 to 1975.
C) significant increases from 1983 to 1994.
D) significant decreases from 2003 to 2010.

Question 67

Compared to the size of GDP in 2014, the net national debt was approximately

A) 10 percent as large.
B) 33 percent as large.
C) 60 percent as large.
D) about twice as large.

Question 68

The deficit can be defined in simple terms as

A) tax receipts − government expenditures + transfers.
B) tax receipts + government expenditures + transfers.
C) government expenditures + transfers − tax receipts.
D) government expenditures − transfers − tax receipts.

Question 69

If in fiscal year 2015, the federal government receives $2.2 trillion in revenues and spends $3.5 trillion for goods and services, the national debt will

A) increase by $2.2 trillion.
B) increase by $1.3 trillion.
C) decrease by $1.3 trillion.
D) decrease by $2.2 trillion.

Question 70

A budget deficit is best defined as the

A) shortage of spending power created by a government spending cut.
B) shortage of spending power created by a tax increase.
C) accumulation of past debt that has not been covered by taxes.
D) amount by which a government's expenditures exceed receipts during a specific time period.

Question 71

Suppose that the economy is currently at full employment. All other things being equal, if the government implements restrictive policies then the appropriate monetary policy is

A) no change from the current policy.
B) reduce the growth of the money supply.
C) constant growth of the money supply.
D) increase the growth of the money supply.

Question 72

If the President and Congress agree to balance the budget during a recession, then the appropriate monetary policy is

A) no change from the current policy.
B) reduce the growth of the money supply.
C) constant growth of the money supply.
D) increase the growth of the money supply.

Question 73

Debt is to deficit as

A) money is to income.
B) flow is to stock.
C) rent is to dividend.
D) property is to wealth.

Question 74

A budget surplus is defined as the amount that the

A) government owes to lenders at any moment in time.
B) government spends in any time period.
C) government's expenditures exceed receipts in any time period.
D) government's receipts exceed expenditures in any time period.

Question 75

At the end of 2014, the net national debt per person in the United States was approximately

A) $14 trillion.
B) $142 billion.
C) $56,000.
D) $86,000.

Question 76

In 2010 and 2011, many observers were worried that the

A) budget would not be balanced and fiscal stimulus would be withdrawn too soon.
B) budget would not be balanced and monetary stimulus would be withdrawn too soon.
C) budget would be balanced and fiscal stimulus would be withdrawn too soon.
D) budget would be balanced and monetary stimulus would be withdrawn too soon.

Question 77

Suppose that the economy is currently at full employment. All other things being equal, if the government implements expansionary fiscal policy, then the appropriate monetary policy is

A) no change from the current policy.
B) reduce the growth of the money supply.
C) constant growth of the money supply.
D) increase the growth of the money supply.

Question 78

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

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

Question 79

The national debt

A) is increased by budget surpluses.
B) is the value of the government's indebtedness at a moment in time.
C) exceeded $20 trillion in 2014.
D) all of the above are correct.

Question 80

Deficit is to debt as

A) responsible is to irresponsible.
B) increase is to decrease.
C) flow is to stock.
D) important is to unimportant.