Deck 15: Sustained Budget Deficits: Is This Any Way to Run a Government

Question 1

If there is widespread unemployment in the economy, an increase in the interest rate caused by financing the deficit through issuing government bonds may be small.

Answer 1

True

Question 2

An actual deficit is the deficit that would occur if the economy were at full employment.

Answer 2

False

Question 3

The net budget balance is total revenue minus total outlays.

Answer 3

True

Question 4

Medicare, medicaid, and Social Security are the major sources of the forecasted long run deficit.

Question 5

If receipts exceed outlays there is a budget deficit.

Question 6

The fiscal imbalance is a measure of the future value of the current deficit.

Question 7

Use of the budget surplus to increase government spending or to decrease taxes would increase aggregate demand.

Question 8

A budget debt occurs when government expenditures exceed government revenues.

Question 9

If the deficit is reduced to zero, the national debt will stop growing.

Question 10

Most of the national debt is held by government agencies.

Question 11

During boom times a tendency exists for the deficit to increase because governments tend to expand programs when the economy is in the expansionary phase of the business cycle.

Question 12

The national debt refers to the amount by which federal government spending exceeds federal government revenues in a given time period.

Question 13

Financing government spending by issuing money will cause higher interest rates.

Question 14

Indexing the alternative minimum tax to inflation will have increase the forecasted deficit.

Question 15

The portion of the debt that the government owes itself is called the intra-governmental holdings.

Question 16

A budget deficit occurs when government expenditures exceed government revenues.

Question 17

If outlays exceed receipts there is a budget surplus.

Question 18

The CBO baseline forecast is a good estimate of the course of the federal unified budget deficit.

Question 19

The Federal budget is a statement of receipts and outlays for a year.

Question 20

The unified budget includes the Social Security receipts and outlays.

Question 21

The Social Security portion of the budget is called the:

A) off-budget surplus.
B) Social Security surplus.
C) on-budget surplus.
D) unified budget surplus.

Question 22

A budget deficit refers to:

A) the aggregate of all federal debt and surpluses that have accumulated over time.
B) the amount by which government revenues exceed government expenditures.
C) the amount by which government expenditures exceed government revenues.
D) the amount by which government transfer payments exceed Social Security contributions.

Question 23

In the long-run deficits are likely to cause:

A) a higher future GDP.
B) a higher trade deficit.
C) a lower rate of inflation.
D) increased trade stability.

Question 24

The total outstanding debt of the federal government consists of:

A) The federal debt, as a percent of GDP.
B) The debt financed by foreigners and Americans.
C) The public debt and debt financed by the government.
D) The public debt and private debt.

Question 25

Funds available for borrowing by other households and firms and by the government are:

A) borrowing funds.
B) investment funds.
C) debt funds.
D) loanable funds.

Question 26

Which of the following statements is not correct?

A) The law requires Social Security to use its surpluses to purchase U.S. Government securities from the Treasury.
B) Public debt will finance most of the on-budget deficit during the next decade.
C) The Social Security surplus will finance most of the on-budget deficit during the next decade.
D) Foreign debt will finance the on-budget deficit during the next decade.

Question 27

Congress distinguishes between on-budget and off-budget net balances primarily to keep separate books on Social Security.

Question 28

It is desirable for the federal government to borrow, provided that the money is spent on projects that yield a flow of future benefits sufficient to repay the loan.

Question 29

The public debt can decline while the gross federal debt grows if:

A) The total outstanding debt of the federal government declines.
B) The public debt is retired.
C) Less of the gross federal debt is financed by the government itself.
D) More of the gross federal debt is financed by the government itself.

Question 30

An increase in the United States budget deficit will:

A) cause the dollar to depreciate.
B) cause the dollar to appreciate.
C) cause a decrease in the supply of dollars.
D) cause a decrease in the demand for dollars.

Question 31

The amount by which government receipts exceeds government outlays over the relevant time span is called:

A) the structural surplus.
B) the national debt.
C) the budget surplus.
D) the budget excess.

Question 32

Which of the following in not true about Net exports (NX):

A) Net exports is exports minus imports.
B) Net exports have been negative for the last 3 decades.
C) Because of net exports, the flow of dollars out of the United States to purchase foreign goods and services is less than the flow of dollars coming in.
D) Net exports is a measure of goods and services exported and imported by the United States.

Question 33

Can deficits can have a positive effect on the economy?

A) No, never.
B) Yes, in the short-run if the economy is at less than full employment.
C) Yes, in the long-run if the economy is at less than full employment.
D) Yes, in the short-run if the economy is at more than full employment.

Question 34

That portion of the national debt held by foreigners represents a burden in the form of fewer goods and services for domestic citizens.

Question 35

Which of the following is not an option for how to allocate the federal budget surplus?

A) Cut taxes
B) Increase government spending
C) Reduce the national debt
D) All of the above are options.

Question 36

The fiscal imbalance measures:

A) the present value of expected future outlays compared to the present value of expected future receipts and the current value of financial assets.
B) the future value of expected receipts less the future value of government outlays and assets.
C) the potential GDP deficit.
D) the GDP gap deficit.

Question 37

Higher productivity growth will affect the deficit by:

A) increasing budget outlays, hence increasing the deficit, ceteris paribus.
B) increasing the tax base, hence decreasing the deficit, ceteris paribus.
C) increasing output less than the increase in social programs, thereby decreasing the debt.
D) both a and b, but not c

Question 38

Investment funds are provided by:

A) private and government savings only.
B) foreign investment.
C) foreign investment and private savings only.
D) private and government savings and foreign investment.

Question 39

Which if the following is not one of the assumption made by the CBO in the baseline forecast for the budget deficit?

A) There is no change in the law as it pertains to tax code or the disbursement of mandatory outlays.
B) Discretionary outlays will grow at the forecasted rate of inflation.
C) The Bush tax cuts are considered permanent.
D) Alternative minimum tax exemptions are not indexed for inflation.

Question 40

During a recession:

A) automatic increases in tax revenues will help to stabilize the economy.
B) automatic increases in government expenditures will help to stabilize the economy.
C) automatic decreases in government expenditures will help to stabilize the economy.
D) government must balance the budget in order to stabilize the economy.

Question 41

In general, economists are more concerned about:

A) the size of the debt relative to GDP.
B) the absolute size of the debt.
C) the size of the debt relative to net national income.
D) the per capita debt.

Question 42

Suppose the economy is currently at full employment. It is likely that:

A) a sustained deficit will lead to an increase in the rate of inflation.
B) a sustained deficit will have no affect on the rate of inflation.
C) a sustained deficit will lead to a increase in GDP.
D) a sustained deficit will lead to an decrease in the rate of inflation.

Question 43

Which of the following is the most important factor to address in order to reduce the fiscal imbalance:

A) Social Security.
B) Medicare.
C) defense spending.
D) the alternative minimum tax.

Question 44

Which of the following statements is correct?

A) Sustained annual budget deficits will produce increased domestic investment.
B) Sustained annual increases in domestic investment will produce smaller domestic capital stock.
C) Smaller domestic capital stock will result in lower future output and income.
D) A sustained budget deficit will have no effect on GDP.

Question 45

Suppose the government finances a budget deficit by issuing money (selling bonds to the Federal Reserve). This method of finance will:

A) cause a significant decrease in investment due to higher interest rates.
B) cause aggregate demand to fall as households save more money in anticipation of higher future taxes that must eventually occur in order to repay the debt.
C) cause aggregate supply to increase due to increased investment.
D) cause a significant increase in aggregate demand because the expansionary effects of the deficit are enhanced by the expansionary effects of the increased supply of money.

Question 46

Which of the following statements is False?

A) The case for lowering taxes with a budget surplus is stronger if the economy is at less than full employment.
B) Sustained budget deficits will produce sustained annual reductions in domestic investment.
C) Older generations have a greater stake in reducing the national debt than younger generations.
D) It would takes several years before the benefits of a reduced national debt would be felt by Americans.

Question 47

Financing a deficit by increasing government spending will:

A) help moderate a recession.
B) decrease future GDP.
C) Increase inflation.
D) All of the above.

Question 48

The increase in the portion of the national debt held by foreigners is cause for concern because:

A) foreigners will have increasing political influence.
B) when the debt is repaid, there may be a reduction in the amount of goods and services available to citizens.
C) there is a redistribution of income from taxpayers to debt holders.
D) The above statement is incorrect. There are no economic consequences associated with increased foreign holdings of the national debt.

Question 49

The assertion that large budget deficits have an adverse impact on the economy is rooted in the idea that deficits would:

A) raise interest rates and therefore lower investment.
B) eliminate the balance of payments deficit.
C) impose a burden on present generations.
D) reduce inflation.

Question 50

The national debt is defined as:

A) the amount by which current government expenditures exceed current government revenues.
B) the amount by which government expenditures have exceeded government revenues over the past decade.
C) the accumulated total of the federal government's deficits and surpluses that have occurred over time.
D) the accumulated total of the federal government's deficits and surpluses that have occurred since World War II.

Question 51

In the long run a budget deficit is likely to cause a decrease in GDP because:

A) private and government savings will increase.
B) domestic investment will decline, lowering future capital stock and hence future GDP.
C) there will be an increase in international confidence and investment.
D) inflation will decline while prices go up.

Question 52

One of the main problems with a large national debt is the fact that:

A) it may cause the government to go bankrupt.
B) large sums of money must be raised to ultimately repay the debt.
C) the debt may drive up interest rates and slow the rate of capital formation.
D) the repayment of interest causes a burden in that there will be fewer goods and services available.

Question 53

Financing a budget deficit by issuing money will:

A) tend to increase interest rates and increase aggregate demand.
B) tend to decrease interest rates and decrease aggregate demand.
C) tend to decrease interest rates and increase aggregate demand.
D) tend to increase interest rates and decrease aggregate demand.

Question 54

Assume the economy is in a boom period. The increase in revenues in the economy has caused government revenues to increase. As a result, the federal government's budget now shows a surplus. If Congress increases government expenditures:

A) inflation would likely result.
B) unemployment would increase.
C) the economy would stabilize at a higher rate of growth.
D) a government deficit would occur.

Question 55

Which of the following is unlikely to occur as a result of a sustained budget deficit?

A) a decrease in the trade deficit.
B) an increase in inflation.
C) a decrease in foreign investment.
D) a decrease in GDP.

Question 56

Which of the following is not true regarding the use of the budget surplus to increase government spending levels?

A) A greater role for government in the economy is undesirable.
B) Increased spending would put downward pressure on the price level.
C) Increased spending would increase aggregate demand.
D) A projected surplus may never materialize and increased spending would just increase the deficit.

Question 57

Economists are more concerned about the public debt than about the gross federal debt because:

A) sale of Treasury securities to the public acquires resources that otherwise might be invested in the private sector.
B) buying Treasury securities from the public acquires resources that otherwise might be invested in the private sector.
C) adding federal securities to and subtracting them from the government's trust fund effects private investments positively.
D) adding federal securities to and subtracting them from the government's trust fund effects private investments negatively.

Question 58

Which of the following statements is correct?

A) The national debt has decreased since the budget agreement has been reached.
B) Because the economy has grown at a rapid rate, the national debt has increased in spite of the budget agreements between Congress and the president.
C) Most of the federal government debt is held by federal agencies.
D) It may sometimes be appropriate for government to run a deficit.

Question 59

It is projected that the public debt will:

A) increase as a percent of GDP in the next decade given the assumptions constructed by the text authors.
B) decrease as a percent of GDP in the next decade given the BO baseline scenario assumptions.
C) remain a consistent share of GDP in the next decade.
D) Both a and b are correct.

Question 60

As a result of the national debt, marginal tax rates will be higher than otherwise. These higher marginal tax rates may result in:

A) decreased work incentives.
B) decreased saving.
C) decreased investment.
D) All of the above.

Question 61

Is the following statement true or False? "Citizens should be concerned if a greater proportion of the national debt is held by foreigners." Defend your answer.

Question 62

Which of the following is most likely to be harmed by a large national debt?

A) an individual currently receiving Social Security benefits.
B) a member of the labor force who will retire in the next ten years.
C) a college graduate who is entering the labor force for the first time.
D) a forty-year old homemaker.

Question 63

Some economists argue that federal budget deficits are overstated. Which of the following is not a factor in this overstatement?

A) inflation.
B) business cycles.
C) Social Security surplus.
D) state and local government net balances.

Question 64

Jennifer earns an above average income and holds part of her wealth in the form of government bonds. Curtis earns an average income and holds no government bonds. Government increases taxes in order to pay the debt. What is the most likely results?

A) Investment will increase.
B) Income will be redistributed from Jennifer to Curtis.
C) Income will be redistributed from Curtis to Jennifer.
D) The productive capabilities of the economy will increase.

Question 65

Evaluate the following statement. "Large national debts harm all citizens because they decrease the rate of investment. This will cause the rate of growth of the capital stock to fall, and eventually living standards will fall."

Question 66

Suppose that in an attempt to increase employment, the government increases spending and runs a deficit. As a result of this deficit there is an increase in interest rates. This deficit was most likely financed by:

A) an increase in marginal tax rates.
B) the Treasury selling securities to the Federal Reserve.
C) the Federal Reserve selling securities to commercial banks.
D) the Treasury selling bonds to firms and households.

Question 67

Explain how the federal government saves the Social Security surplus.

Question 68

Suppose that prior to 1998 the national debt of Utopia was $0. In 1998, the government incurred a deficit of $200 million. In 1999, 2000, and 2001 the government incurred a deficit of $180 million, $140 million, and $130 million, respectively. Currently, what is the national debt of Utopia?

A) $650 million.
B) $450 million.
C) $270 million.
D) $130 million.

Question 69

Use the following diagram to answer the following questions.

Refer to Loanable Funds. If the demand for loanable funds is D₁, the equilibrium interest rate and quantity of funds are:

A) i₁ and F₁, respectively.
B) i₂ and F₂, respectively.
C) i₁ and F₂, respectively.
D) i₂ and F₁, respectively.

Question 70

Which allocation of the budget surplus would lead to a slow accumulation of the nation's capital stock-eventually causing increases in consumption?

A) Using the surplus to reduce the national debt
B) Using the surplus to increase government spending levels
C) Using the surplus to pay for new government programs.
D) Using the surplus to increase taxes

Question 71

A deficit financed by issuing U.S. Treasury bonds to the private sector will have an insignificant effect on the interest rate if:

A) the economy is at the peak of the business cycle.
B) unemployment rates are relatively low.
C) the economy is near the peak of the business cycle.
D) the economy is in a severe recession.

Question 72

"One of the biggest problems associated with a large national debt is the burden that occurs when interest and principal are paid to debt holders." Is this statement true or False? Defend your answer.

Question 73

Use the following diagram to answer the following questions.

Refer to Loanable Funds. An increase in the federal budget deficit financed by issuing U.S. Treasury bonds would most likely:

A) cause demand to shift from D₂ to D₁.
B) cause demand to shift from D₁ to D₂.
C) cause the equilibrium rate of interest to change from i₂ to i₁.
D) cause the equilibrium quantity of funds supplied to fall.

Question 74

Use the following diagram to answer the following questions.

Refer to Loanable Funds. A shift in financing of the federal budget deficit away from public debt to internal financing would most likely:

A) cause demand to shift from D₂ to D₁.
B) cause demand to shift from D₁ to D₂.
C) cause the equilibrium rate of interest to change from i₂ to i₁.
D) cause the equilibrium quantity of funds supplied to fall.

Question 75

Use the following diagram to answer the following questions.

Refer to Loanable Funds. Suppose the demand for loanable funds is initially D₁ and the supply of loanable funds is S. If the interest rate is currently greater than i₁, then:

A) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and the interest rate will rise.
B) the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and the interest rate will decrease.
C) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and the interest rate will decrease.
D) the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and the interest rate will increase.

Question 76

In which instance would it be most desirable for government to borrow?

A) Government incurs a deficit to purchase farm surpluses.
B) Government incurs a deficit to pay Social Security benefits.
C) Government incurs a deficit to pay welfare benefits.
D) Government incurs a deficit to construct a new highway system.

Question 77

A deficit financed by issuing U.S. Treasury bonds to the private sector will:

A) cause the dollar to appreciate, thereby decreasing the relative price of exports.
B) cause the dollar to depreciate, thereby decreasing the relative price of exports.
C) cause the dollar to appreciate, thereby increasing the relative price of exports.
D) cause the dollar to depreciate, thereby increasing the relative price of exports.

Question 78

Evaluate the following statement. "Older generations have less of a stake in decreasing the national debt than do younger generations."

Question 79

The government is justified in running a deficit and financing it by issuing U.S. Treasury bonds to the private sector when:

A) the economy is in the contractionary phase of the business cycle.
B) the economy is in the expansionary phase of the business cycle.
C) the economy is at the peak of the business cycle.
D) The government should never run a deficit as this will force up interest rates.

Question 80

Suppose the federal government incurs a deficit because the economy enters a recession. In attempts to balance the budget, Congress enacts a temporary increase in marginal tax rates. This policy will:

A) balance the budget and restore economic stability as individuals become confident about government's ability to shrink the deficit.
B) likely cause aggregate demand to fall, thereby worsening the recession.
C) likely cause aggregate demand to increase, thereby restoring full employment.
D) cause aggregate demand to fall as consumption decreases; however, this decrease will be offset by an increase in investment as interest rates fall in response to the decreased demand for loanable funds.