1. Government deficits mean that
a.
national saving is negative so public saving is negative.
b.
national saving is negative so public saving is lower than otherwise.
c.
public saving is negative so national saving is negative.
d.
public saving is negative so national saving is lower than otherwise.
2. The national debt
a.
b.
c.
d.
3. Part of the argument against deficits is that they
a.
increase interest rates and investment.
b.
increase interest rates and decrease investment.
c.
decrease interest rates and investment.
d.
decrease interest rates and increase investment.
4. If the budget deficit were reduced,
a.
interest rates and investment would increase.
b.
interest rates would increase and investment would decrease.
c.
interest rates and investment would decrease.
d.
interest rates would decrease and investment would increase.
5. The effect of budget deficits on interest rates
a.
increases private investment, so eventually the capital stock rises.
b.
increases private investment, so eventually the capital stock falls.
c.
decreases private investment, so eventually the capital stock rises.
d.
decreases private investment, so eventually the capital stock falls.
6. Over time, continued budget deficits lead to
a.
a higher capital stock and higher productivity.
b.
a higher capital stock and lower productivity.
c.
a lower capital stock and higher productivity.
d.
a lower capital stock and lower productivity.
7. In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a
deficit of $159 billion. Other things the same, this change would be expected to have
a.
decreased interest rates and investment.
b.
decreased interest rates and increased investment.
c.
increased interest rates and investment.
d.
increased interest rates and decreased investment.
8. In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a
deficit of about $1,413 billion. Other things the same, this change would be expected to have
a.
decreased interest rates and investment.
b.
decreased interest rates and increased investment.
c.
increased interest rates and investment.
d.
increased interest rates and decreased investment.
9. In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a
surplus of about $69.3 billion. Other things the same, we would expect this change
a.
decreased interest rates and investment.
b.
decreased interest rates and increased investment.
c.
increased interest rates and investment.
d.
increased interest rates and decreased investment.
10. From fiscal year 2012 to fiscal year 2013 China’s budget deficit rose 50%. Other things the same, we would expect
this to have
a.
decreased interest rates and investment.
b.
decreased interest rates and increased investment.
c.
increased interest rates and investment.
d.
increased interest rates and decreased investment.
11. In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012, the government ran
a deficit of about $1,087 billion. Other things the same, this change would be expected to have
a.
decreased interest rates and investment.
b.
decreased interest rates and increased investment.
c.
increased interest rates and investment.
d.
increased interest rates and decreased investment.
12. Which of the following is not correct?
a.
A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and
output growth.
b.
Deficits give people the opportunity to consume at the expense of their children, but they do not require them
to do so.
c.
The U.S. debt per-person is large compared with average lifetime income.
d.
Current spending may benefit future generations.
13. Which of the following is correct?
a.
Deficits always require people to consume at the expense of their children.
b.
If the government uses funds to pay for investment programs, on net the debt need not burden future
generations.
c.
If the government is in debt it must be running a deficit currently.
d.
The current government debt is a large share of lifetime income.
14. Which of the programs below would not transfer wealth from young to old generations?
a.
Taxes are reduced as a result of cutting expenditures on education.
b.
Taxes are raised to improve government infrastructure such as roads and bridges.
c.
Taxes are raised to provide more generous Social Security benefits.
d.
Taxes are raised to provide more generous Medicare benefits.
15. Which of the programs below would transfer wealth from the young to the old?
a.
Taxes are raised to provide better education.
b.
Taxes are raised to improve government infrastructure such as roads and bridges.
c.
Taxes are raised to provide more generous Social Security benefits.
d.
None of the above transfer wealth form the young to the old.
16. Which of the following would transfer wealth from old to young?
a.
Increases in the budget deficit.
b.
Decreased building of highways and bridges.
c.
More generous education subsidies.
d.
Indexation of Social Security benefits to inflation.
17. Which of the following is not correct?
a.
Government debt can continue to rise forever.
b.
If the government uses funds to pay for investment programs, on net the debt need not burden future
generations.
c.
Social Security does not transfer wealth from younger generations to older generations.
d.
The average U.S. citizens’ share of the government debt represents less than 2 percent of her lifetime income.
18. Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created
by these continuing deficits is
a.
sustainable, but the future burden on your children cannot be offset.
b.
sustainable, and the future burden on your children can be offset if you save for them.
c.
not sustainable, and the future burden on your children cannot be offset.
d.
not sustainable, but the future burden on your children can be offset if you save for them.
19. Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5
percent per year. Then the government can have a deficit of about
a.
5 percent of GDP without raising the debt-to-income ratio.
b.
4.5 percent of GDP without raising the debt-to-income ratio.
c.
1.25 percent of GDP without raising the debt-to-income ratio.
d.
.5 percent of GDP without raising the debt-to-income ratio.
20. Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about
3 percent per year. Suppose also that it has nominal GDP of about 400 billion units of currency and current nominal
national debt of 200 billion units of domestic currency. Which of the following government spending and taxation figures
will keep the debt to-income ratio constant?
a.
government spending equal to 30 billion units and tax collections equal to 25 billion units
b.
government spending equal to 30 billion units and tax collections equal to 20 billion units
c.
government spending equal to 30 billion units and tax collections equal to 10 billion units
d.
government spending equal to 30 billion units and tax collections equal to 5 billion units
21. Suppose that the country of Aquilonia has an inflation rate of about 6 percent per year and a real growth rate of about
3 percent per year. Suppose also that it has nominal GDP of about 500 billion units of currency and current nominal
national debt of 100 billion units of domestic currency. Which of the following government spending and taxation figures
will keep the debt to income ratio constant?
a.
government spending equal to 50 billion units and tax collections equal to 48 billion units
b.
government spending equal to 50 billion units and tax collections equal to 41 billion units
c.
government spending equal to 50 billion units and tax collections equal to 40 billion units
d.
government spending equal to 50 billion units and tax collections equal to 32 billion units
22. A country has a growth rate of 3%. Government spending is 60 billion units of currency and its tax revenues are 32
billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt-to–
income ratio unchanged?
a.
2%
b.
3%
c.
4%
d.
5%
23. Last year a country’s real GDP grew by 4%, it’s inflation rate was 2.5%, and it’s government budget deficit was about
$250 billion. It’s debt to GDP ratio was unchanged. About what was it’s debt at the start of last year?
a.
16.7 trillion
b.
10.0 trillion
c.
6.25 trillion
d.
3.85 trillion
24. Last year a country’s real GDP grew by 2%, it’s inflation rate was 3%, and it’s government budget deficit was about
$200 billion. It’s debt-to–GDP ratio was unchanged. About what was it’s debt at the start of last year?
a.
10.0 trillion
b.
6.7 trillion
c.
4 trillion
d.
None of the above are correct.
25. From the end of 2005 to the end of 2006, the United States ran a deficit of about $309 billion. The debt at the start of
this period was about $4,592 billion. Which of the following combinations of inflation and real GDP growth would have
allowed the government to run this deficit while keeping the ratio of real GDP to the debt about the same?
a.
about 3% inflation and about 2.2% real GDP growth
b.
about 3% inflation and about 3.2% real GDP growth
c.
about 3.4% inflation and about 3.3% real GDP growth
d.
about 3.4% inflation and about 4% real GDP growth
26. At the end of 2007, the government had a debt of about $5,000 billion. During 2007, real GDP grew by about 0.8
percent and inflation was about 2.7 percent. About what is the largest deficit the government could have run without
raising the debt-to–GDP ratio?
a.
135 billion
b.
143 billion
c.
169 billion
d.
175 billion
27. In June of 2010, the government had a debt of about $8.6 trillion. Over the next year real GDP grew by about 1.6%
and inflation was about 2%. What is the largest deficit the government could have run over this time without raising the
debt-to–GDP ratio?
a.
about $68.8 billion
b.
about $137.6 billion
c.
about $275.2 billion
d.
about $309.6 billion
28. At the end of 2011 the U.S. government had a debt of about $10.12 trillion. During 2012 inflation was about 2.5% and
real GDP grew about 1.6%. What is the largest deficit the government could have had in 2012 without raising the ratio of
debt to GDP?
a.
about 414.9 billion
b.
about 404.8 billion
c.
about 253.0 billion
d.
about 161.9 billion
29. At the end of 2012, the government had a debt of about $11.3 trillion. If during 2013 real GDP rose 2% and inflation
was 2.2%, what is the largest deficit the government could have run without raising the debt-to–GDP ratio?
a.
about $226.0 billion
b.
about $248.6 billion
c.
about $474.6 billion
d.
about $561.8 billion
30. Between 1980 and 1995 government debt as a percentage of GDP
a.
increased from about 25% to 50%.
b.
decreased from about 50% to 25%.
c.
decreased from about 25% to almost zero.
d.
increased from about 10% to 20%.
31. Which of the following reduces the potential burden of an increase in debt on future generations?
a.
the growth rate of output is high
b.
in response to increased debt, parents save more to leave their children larger bequests
c.
some current government spending benefits future taxpayers
d.
All of the above are correct.
32. Which of the following does not reduce the potential burden of an increase in debt on future generations?
a.
the growth rate of output is high
b.
in response to increased debt, parents save more to leave their children larger bequests
c.
budget deficits raise interest rates
d.
All of the above are correct.
33. Which of the following is not correct?
a.
Deficits give people the opportunity to consume at the expense of their children, but deficits do not require
them to do so.
b.
Deficits and surpluses could be used to avoid fluctuations in the tax rate.
c.
The only times deficits have increased have been during times of war or economic downturns.
d.
Reducing the budget deficit rather than funding more education spending could, all things considered, make
future generations worse off.
34. Which of the following is not a typical justification for running a budget deficit?
a.
financing a war
b.
dealing with a recession
c.
fighting inflation
d.
dealing with unemployment
35. Which of the following are justifications for running a budget deficit?
a.
avoiding raising tax rates
b.
stabilizing an economy during a recession
c.
both a and b
d.
neither a nor b
36. Which of the following are justifications for running a budget deficit?
a.
stabilizing the economy during a recession
b.
future generations will benefit from some current expenditures
c.
both a and b
d.
neither a nor b
37. If the government cut expenditures during an expansion
a.
it would have to raise the tax rate
b.
it would tend to stabilize the economy
c.
both a and b
d.
neither a nor b
38. Which of the following is not an argument in favor of requiring the government to balance its budget?
a.
Government debt imposes higher taxes or more borrowing on future generations.
b.
A balanced budget will smooth the business cycle.
c.
Deficits lower national saving.
d.
Recent history shows that Congress will run deficits even when deficits are not justified by war or recession.
39. Which of the following is an argument in favor of a balanced budget rule?
a.
Some economists believe that rules are better than discretion.
b.
Per-capita debt is small relative to lifetime income.
c.
The effect of deficit spending on future generations depends in part on what the government buys.
d.
Other government policies also redistribute income across generations.
40. A balanced budget would require that when real GDP was growing rapidly,
a.
the government raise taxes or cut expenditures. This would increase the magnitude of economic fluctuations.
b.
the government raise taxes or cut expenditures. This would decrease the magnitude of economic fluctuations.
c.
the government cut taxes or raise expenditures. This would increase the magnitude of economic fluctuations.
d.
the government cut taxes or raise expenditures. This would decrease the magnitude of economic fluctuations.
41. If tax rates are raised to avoid a deficit during a recession, then
a.
real GDP and deadweight loss from taxes will rise.
b.
real GDP will rise and deadweight loss from taxes will fall.
c.
real GDP will fall and deadweight loss from taxes will rise.
d.
real GDP and deadweight loss from taxes will fall.