978-1259723223 Test Bank TBChap033 Part 10

33-175

332.

Refer to the graph. The economy was initially in equilibrium at point 3, but then interest rates

increase by 4 percentage points because of government deficit

financing. The public spending,

however, improves business confidence and activity that exactly offsets the potential crowding–

out effect. This situation would result

in a new equilibrium at point

333.

Interest Rate

Id1

Id2

5%

$500

$600

4

600

700

3

700

800

2

800

900

1

900

1,000

The table gives data on interest rates and investment demand (in billions of dollars) in a

hypothetical economy. Using the Id1 schedule, assume that the government

needs to finance the

public debt and this public borrowing increases the interest rate from 3 percent to 4 percent. How

much crowding out of private investment will

occur?

334.

Interest Rate

Id1

Id2

5%

$500

$600

4

600

700

3

700

800

2

800

900

1

900

1,000

The table gives data on interest rates and investment demand (in billions of dollars) in a

hypothetical economy. Assume that the public debt is used to expand the

capital stock of the

economy and that, as a consequence, the investment-demand schedule changes from Id1 to Id2.

At the same time, the interest rate rises from 3

percent to 4 percent as the government borrows

money to finance the public debt. How much crowding out of private investment will occur in this

case?

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AACSB: Knowledge Application

Blooms: Understand

Diff i cult y :

02 Medium

Learning Objective: 33-06 Discuss the size, composition, and consequences of the U.S.

public debt.

Test Bank: II

Topic:

The U.S. Public Debt

335.

The Social Security program is designed to pay

336.

Through the start of 2009, Social Security revenues exceeded payouts, and the excess

inflow was used to buy

337.

In the later part of 2009, something historic happened relative to Social Security; for the first

time,

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A. Social Security revenues became zero.

B. Social Security contributions fell short of payouts.

C.

Social Security payouts did not increase.

D.

the Social Security Trust Fund ran out of funds.

338.

A major concern with the Social Security trust fund is that

339.

Which of the following is not a similarity between Medicare and Social Security?

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written consent of McGraw-Hill Education.

Topic:

The U.S. Public Debt

True / False Questions

340.

Expansionary fiscal policy during a recession means cutting taxes, increasing government

spending, or taking both actions.

341.

A decrease in taxes is one way to pursue a contractionary fiscal policy because it will make

government revenues contract.

342.

The goal of expansionary fiscal policy is to rein in inflation.

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343.

If the government wants to reduce unemployment using fiscal policy, it may do so by

increasing government spending.

344.

Expansionary fiscal policy will tend to reduce the budget deficit.

345.

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that

reinforce each other.

346.

The flexibility of the price level tends to dampen the multiplier effect of fiscal policy.

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TRUE

347.

Built–in stability is exemplified by the fact that with a progressive tax system, net tax

revenues decrease when GDP decreases.

348.

If taxation becomes more progressive, the built-in stability in the economy will decrease.

349.

Transfer payments that increase as GDP falls are a type of automatic stabilizer in the

economy.

33-182

written consent of McGraw-Hill Education.

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Diffic ult y: 02 Medium

Learning Objective: 33-02 Explain the role of built-in stabilizers in moderating business

cycles.

Test Bank: II

Topic: Built-In Stability

350.

The key to assessing whether fiscal policy is expansionary or not is to observe the change in

the cyclically adjusted budget balance.

351.

If the cyclically adjusted budget has a zero deficit but the actual budget has a $100 billion

deficit, then that means that the government is pursuing an expansionary

fiscal policy.

352.

The actual and cyclically adjusted budgets will be equal when the economy is at full

employment.

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Diffic ult y: 02 Medium

Learning Objective: 33-03 Describe how the cyclically adjusted budget reveals the status

of U.S. fiscal policy.

Test Bank: II

Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined

353.

If the cyclically adjusted budget deficit goes from 2 percent to 1 percent of GDP, then it

indicates that fiscal policy has turned more contractionary.

354.

The “stimulus package” that the government implemented in response to the Great Recession

of 2007–09 made the cyclically adjusted budget of the U.S. have a very

large positive balance in

that time period.

355.

The so-called recognition lag associated with fiscal policy is a result of how slowly the U.S.

Congress moves.

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Learning Objective: 33-05 Discuss the problems that governments may encounter in

enacting and applying fiscal policy.

Test Bank: II

Topic: Problems, Criticisms, and Complications of Implementing Fiscal Policy

356.

The concept of a “political business cycle” implies a misuse of fiscal policy making it a

source of economic instability.

357.

The impact of an expansionary fiscal policy may be strengthened if it crowds out some

private investment spending.

358.

The so-called crowding–out effect refers to government spending crowding out private

investment spending.

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Test Bank: II

Topic: Problems, Criticisms, and Complications of Implementing Fiscal Policy

359.

The crowding–out effect will be minimal when the economy is in a severe recession.

360.

It is possible for an increase in government spending to encourage, instead of crowding out,

private investment.

361.

A budget deficit causes the government to issue or sell Treasury bonds.

362.

If the budget deficit becomes smaller, then it will cause the public debt to also become

smaller.

363.

As of 2015, more than half of the total debt of the U.S. government was owed to foreigners.

364.

More than half of the U.S. public debt is owed to Americans.

365.

A large public debt would not bankrupt the Federal government, because it can refinance

the debt or increase taxes to pay the debt.

33-187

written consent of McGraw-Hill Education.

AACSB: Knowledge Application

A c c e s s i b i l i t y :

Keyboard Navigation

Blooms: Understand

Diff i cult y :

02 Medium

Learning Objective: 33-06 Discuss the size, composition, and consequences of the U.S.

public debt.

Test Bank: II

Topic:

The U.S. Public Debt

366.

The payment of interest on the public debt in the United States mildly increases income

inequality.

367.

The portion of the public debt owed to foreigners does not represent any real economic

burden to Americans because we received money from foreigners when we

incurred the debt.

368.

The Social Security program is a retirement system where payments to retirees come from

their previous contributions.

33-188

written consent of McGraw-Hill Education.

Blooms: Understand

Diffic ult y: 02 Medium

Learning Objective: 33-06 Discuss the size, composition, and consequences of the U.S.

public debt.

Test Bank: II

Topic: The U.S. Public Debt

369.

When Social Security contributions have exceeded payouts in the past, the excess amounts

were used to help finance the Federal government’s budget deficits.

370.

The Medicare trust fund is expected, if current flows continue, to be depleted within a

couple of decades.