Chapter 13—Federal Deficits, Surpluses, and the National Debt
MULTIPLE CHOICE
1. The federal budget process begins when federal agencies submit their budget requests to the:
a.
Treasury Department.
b.
Council of Economic Advisors (CEA).
c.
Office of Management and Budget (OMB).
d.
Congressional Budget Office (CBO).
2. Each year, the president must submit a budget proposal to Congress by:
a.
January.
c.
July.
b.
April.
d.
October.
3. If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to
operate only if Congress has passed a:
a.
balanced budget amendment.
c.
conference resolution.
b.
deficit reduction plan.
d.
continuing resolution.
4. Which of the following groups analyzes federal budgets proposals?
a.
The Council of Economic Advisors.
b.
The Office of Management and Budget.
c.
The Congressional Budget Office.
d.
The House and Senate Budget Committees.
5. If the fiscal year begins without a budget and Congress fails to pass continuing resolution, then:
a.
the president has the right to raise the debt ceiling.
b.
federal agencies operate on the basis of the previous year’s budget.
c.
the interest rate paid on the national debt automatically increases.
d.
the federal government shuts down.
6. Between 1998 and 2001, the federal budget was:
a.
never in surplus.
b.
in surplus about as often as it was in deficit.
c.
in surplus.
d.
never in deficit.
7. Which of the following is true?
a.
A budget deficit will have no impact on the national debt.
b.
A budget deficit will increase the national debt.
c.
A balanced budget will increase the national debt.
d.
A budget surplus will increase the national debt.
8. Currently, the Social Security Trust Fund is running a:
a.
deficit, which reduces the apparent size of the budget deficit.
b.
surplus, which reduces the apparent size of the budget deficit.
c.
surplus, which increases the apparent size of the budget deficit.
d.
deficit, which increases the apparent size of the budget deficit.
9. If the federal government were to run a budget deficit, this would:
a.
increase the size of the national debt.
b.
reduce the size of the national debt.
c.
leave the size of the national debt unchanged.
d.
increase the national debt only if the government also expands the supply of money.
10. When the U. S. federal government runs a budget deficit, it borrows money by selling:
a.
Treasury bills, notes, and bonds.
c.
its gold reserves.
b.
publicly owned land.
d.
financial assets located in foreign banks.
11. It is important to distinguish between the privately held portion of the national debt and the portion
held by government agencies and the Federal Reserve System because:
a.
the government will not have to repay the privately held debt.
b.
only the privately held debt creates a net interest liability for the federal government.
c.
the privately held debt does not create a net interest liability for the federal government.
d.
taxes will have to be raised in order to pay the interest on the debt held by the Federal
Reserve system.
12. How does inclusion of the current revenues and expenditures of the Social Security trust fund into the
budget calculation affect the reported budget deficit of the federal government?
a.
It increases the reported deficit.
b.
It reduces the reported deficit.
c.
It exerts no effect on the reported deficit.
d.
It increases the deficit during an economic boom but reduces it during a recession.
13. The national debt is the:
a.
difference between a nation‘s exports and imports of goods and services.
b.
sum of the personal debt of all citizens in the United States.
c.
indebtedness of the federal government in the form of outstanding interest-earning
government security.
d.
sum of the net personal debts of Americans to foreigners.
14. The national debt is:
a.
the difference between a nation’s exports and imports of goods and services.
b.
the sum of the personal debt of all citizens in the United States.
c.
the cumulative effect of all past budget deficits and surpluses of the federal government.
d.
equal to the current size of the budget deficit.
15. If the federal government runs a budget deficit, but the budget deficit as a percent of GDP is less than
the growth rate of real output, the:
a.
national debt will decrease as a share of GDP.
b.
national debt will remain a constant share of GDP.
c.
national debt will increase as a share of GDP.
d.
size of the national debt (in dollar value) will decline.
16. The sum of past federal budget deficits is the:
a.
GDP debt.
c.
national debt.
b.
trade debt plus GDP.
d.
Congressional debt.
17. The sum of past federal deficits is reflected in the federal:
a.
cyclical debt.
c.
national debt.
b.
Congressional debt.
d.
GDP debt.
18. The total accumulated debt of the federal government due to deficit spending is called the:
a.
federal deficit.
c.
deficit debt ceiling.
b.
Congressional debt.
d.
national debt.
19. To finance a federal budget deficit, the U.S. Treasury borrows by selling:
a.
Treasury bills.
c.
Treasury bonds.
b.
Treasury notes.
d.
All of these.
20. The national debt is best described as the:
a.
amount by which this year’s federal spending exceeds its taxes.
b.
value of all U. S. Treasury bonds owned by foreigners.
c.
sum of all federal budget deficits, past and present.
d.
percentage of GDP needed to finance a country’s investment.
21. If the federal government has a budget surplus, then the national debt is:
a.
reduced.
c.
negative.
b.
fully repaid.
d.
interest-free.
22. With regard to the national debt, to whom does the federal government owe money?
a.
Taxpayers.
b.
Federal government workers.
c.
The Federal Reserve System.
d.
Investors who buy U.S. Treasury bills, bonds, and notes.
23. The sum of past federal budget deficits increases the:
a.
GDP debt.
c.
national debt.
b.
trade debt plus debt.
d.
Congressional debt.
24. Which of the following is false?
a.
The national debt’s size decreased steadily after World War II.
b.
The national debt increases in size whenever the federal government has a surplus budget.
c.
The size of the national debt currently is about the same size as it was during World War
II.
d.
All of the above are true.
e.
All of the above are false.
25. Which of the following statements is true?
a.
The national debt is the current year’s amount by which the government is spending more
than it collects as taxes.
b.
Deficits are financed by the government issuing for sale more government securities.
c.
The debt ceiling refers to the amount of debt at which the government is officially
declared as being bankrupt.
d.
Internal national debt is the portion of the national debt owed to foreigners.
26. After 1945, the national debt as a percent of GDP:
a.
decreased slightly.
b.
decreased substantially.
c.
remained about the same.
d.
increased slightly.
e.
increased substantially.
27. Which of the following is true?
a.
The size of the national debt currently is about the same size as it was during World War
II.
b.
The national debt increases in size whenever the federal government has a surplus budget.
c.
The national debt’s size decreased steadily after 1980.
d.
The current U.S. national debt is over $12.0 trillion.
28. Currently, the national debt is approximately:
a.
10 percent of GDP.
c.
80 percent of GDP.
b.
60 percent of GDP.
d.
120 percent of GDP.
29. Which of the following statements is true?
a.
The national debt as a percentage of GDP is greater today than during any other period in
our nation’s history.
b.
A sizeable external national debt will transfer purchasing power away from foreigners to
domestic citizens.
c.
Keynesian theory assumes a total crowding out effect associated with deficit spending.
d.
U.S. national debt is 12 times its size in 1980.
30. When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of:
a.
World War II.
c.
The Reagan defense buildup and tax cut.
b.
The Vietnam War.
d.
The Bush economic recovery program.
31. What is the difference between the federal budget deficit and the national debt?
a.
The budget deficit is the amount by which expenditures exceed revenues in a particular
year, while the national debt is the cumulative effect of all past budget deficits and
surpluses.
b.
The budget deficit is the cumulative effect of all prior national debts.
c.
The national debt includes all outstanding bonds, while the budget deficit excludes bonds
held by government agencies.
d.
This is a trick question because there is no difference between the budget deficit and the
national debt.
32. The national debt is unlikely to cause national bankruptcy because the federal government can:
a.
raise taxes.
c.
refinance its debt.
b.
print money.
d.
all of these.
33. The national debt is unlikely to cause national bankruptcy because the:
a.
national debt can be refinanced by issuing new bonds.
b.
interest on the public debt equals GDP.
c.
national debt cannot be shifted to future generations for repayment.
d.
federal government cannot refinance the outstanding national debt.
34. Among the major industrial economies, which of the following had the lowest national debt as a
percent of GDP?
a.
Canada
c.
United States
b.
Australia
d.
Italy
35. As the size of a nation’s outstanding debt gets larger and larger relative to the size of the economy:
a.
eventually it will become difficult for the country to borrow in global credit markets.
b.
the country will have to pay higher real interest rates in order to induce investors to
purchase its bonds.
c.
at some point, the country will be more or less forced to bring spending into line with
revenues in order to maintain the confidence of investors.
d.
all of these are correct.
36. How does the national debt as a percentage of GDP in the United States compared to the United
Kingdom?
a.
U.S. national debt ratio is smaller.
b.
U.S. national debt ratio is slightly larger.
c.
U.S. national debt ratio is substantially larger.
d.
U.S. national debt ratio is substantially smaller.
37. Which of the following countries has the largest national debt as a percentage of GDP?
a.
France.
b.
Japan.
c.
United States.
d.
Canada.
e.
Italy.
38. Compared to most other industrialized countries shown in the text, the national debt as a percentage of
GDP in the United States is:
a.
substantially larger.
c.
slightly larger.
b.
the same.
d.
substantially smaller.
39. Which of the following portions of the national debt impose a net interest burden on the federal
government?
a.
treasury bonds held by government agencies
b.
treasury bonds held by private investors
c.
treasury bonds held by the Federal Reserve system
d.
treasury bonds held in the Social Security Trust Fund
40. In recent years, net interest on the national debt paid by the federal government as a percentage of
GDP is equal to approximately:
a.
1 to 3 percent.
b.
5 to 9 percent.
c.
10 to 14 percent.
d.
15 to 19 percent.
e.
20-25 percent.
41. Since 1995, the net interest payment as a percentage of GDP has:
a.
declined.
c.
tripled.
b.
doubled.
d.
quadrupled.
42. The idea that a large national debt is “mortgaging the future of our children and grandchildren” is
misleading because:
a.
it is the Federal Reserve that will be responsible for making interest payments on the debt.
b.
future generations will have to bear the opportunity costs of the resources that are used
today.
c.
future generations will not be liable for the interest obligations of the national debt.
d.
future generations will inherit the interest income as well as the interest obligations.
43. External debt is that portion of the national debt:
a.
held by private investors.
b.
held by the Federal Reserve.
c.
that the United States does not intend to repay.
d.
held by foreigners.
44. Most of the U.S. national debt is owed to ____. Thus a rising national debt implies that there will be a
future redistribution of income and wealth in favor of ____.
a.
foreigners; foreigners
b.
other U.S. citizens; bondholders
c.
foreigners; those needing government services
d.
other U.S. citizens; those needing government services
45. Which of the following owns the largest proportion of the national debt?
a.
Foreigners.
b.
Federal, state, and local governments and the Federal Reserve.
c.
Private individuals, banks, and corporations.
d.
None of these.
46. Which of the following U.S. Treasury securities represents ownership of the national debt?
a.
Bonds owned by the banks and insurance companies.
b.
Bonds owned by private individuals.
c.
Bonds owned by foreigners.
d.
All of these.
47. One concern over external national debt is that interest and principal payments transfer wealth
overseas. The percentage of the national debt held in recent years by foreigners is approximately:
a.
5 percent.
b.
10 percent.
c.
20 percent.
d.
30 percent.
e.
50 percent.
48. Which of the following is true if all the national debt were owned internally?
a.
The federal government would not need to refinance the national debt.
b.
The federal government would not need to worry about raising taxes to pay interest on the
national debt.
c.
We would still be concerned about the effect on the distribution of income from interest
payments on the national debt.
d.
All of these are true.
49. Currently, how much of the U.S. national debt is owed to foreigners?
a.
About 2.5 percent.
c.
About 30 percent.
b.
About 25 percent.
d.
About 59 percent.
50. Which of the following is a valid concern about federal budget deficits?
a.
The welfare of future generations will be directly related to the per-capita size of the
national debt that they inherit.
b.
Growth of the national debt will eventually lead to the bankruptcy of the government.
c.
When the debt comes due, future generations may be unable to pay it off.
d.
If the increases in the national debt reduce private expenditures on capital formation,
aggregate demand is reduced.
51. According to the crowding-out view, budget deficits will:
a.
reduce interest rates.
b.
increase interest rates and retard private investment.
c.
reduce the investments of foreigners in the United States.
d.
increase the capital stock available to future generations.
52. The crowding-out effect refers to:
a.
higher interest rates and reduced private spending that results from financing federal
budget deficits.
b.
higher future taxes accompanying budget deficits to reduce private consumption.
c.
the inflation rate to rise when the unemployment rate is low.
d.
increases in private savings to reduce interest rates and, thereby, crowd-out government
53. If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?
a.
It will make fiscal policy more potent.
b.
It will make fiscal policy less potent.
c.
The potency of fiscal policy will be unaffected.
d.
The potency of contractionary will be reduced.
54. “Crowding out” is the theory that an increase in our federal government’s budget deficit will likely:
a.
increase the national debt.
b.
increase interest rates.
c.
decrease borrowing by households and businesses
d.
reduce the impact of the spending multiplier implies because of crowding out.
e.
all of these.
55. Supply-side economists argue that less government spending:
a.
will contract the productive side of the economy.
b.
will result in more crowding out.
c.
causes higher rates of unemployment and inflation.
d.
would cause interest rates to increase dramatically.
e.
would make more investment capital available at lower rates of interest to the private
sector.
56. Supply-siders feel that high levels of government spending:
a.
assist private sector investing by creating infrastructure.
b.
have no impact on private sector investment.
c.
complement private spending.
d.
cause private sector investment to decline because of crowding out.
e.
cause private sector spending to decrease because of increases in corporate taxes to
finance the government spending.
57. Supply-siders argue that:
a.
reductions in government spending cut infrastructure investment which hurts private
sector investment.
b.
increases in government spending increase infrastructure investment which helps private
sector investment.
c.
increases in government spending causes private sector investment to fall because the
government pushes up interest rates.
d.
reductions in government spending cause private sector investment to fall because the
government pushes up interest rates by borrowing.
e.
increases in government spending causes consumption spending to fall because the
government purchases push up interest rates.
58. Crowding out occurs when the federal government:
a.
raises taxes to finance a budget deficit.
b.
refinances maturing U.S. Treasury bonds.
c.
borrows by selling bonds to finance a deficit.
d.
uses a budget surplus to pay off part of the national debt.
59. Crowding out refers to the situation in which:
a.
borrowing by the federal government raises interest rates and causes firms to invest less.
b.
foreigners sell their bonds and purchase U.S. goods and services.
c.
borrowing by the federal government causes state and local governments to lower their
taxes.
d.
increased federal taxes to balance the budget causes interest rates to increase and
consumer credit decreases.
60. Which of the following statements about crowding out is false?
a.
It is not caused by a budget surplus.
b.
It is caused by a budget deficit.
c.
It can completely offset the multiplier.
d.
It affects interest rates and not economic growth.
61. The crowding-out effect can be:
a.
zero.
c.
complete.
b.
partial.
d.
any of these.
62. A concern about crowding out caused by increased government borrowing is that:
a.
interest rates on private borrowing fall.
b.
lower rates of economic growth can result from a decline in business investment spending.
c.
the federal government may default on its loans.
d.
foreign lenders find it less attractive to help finance federal deficits.
63. Which of the following statements about crowding out is true?
a.
It can completely offset the multiplier.
c.
It is not caused by a budget surplus.
b.
It is caused by a budget deficit.
d.
All of these are true.
64. When crowding out occurs, higher government spending results in higher interest rates, which in turn
results in:
a.
higher inflation.
c.
a larger debt ceiling.
b.
less consumption and investment.
d.
more tax revenues.
65. Critics of Keynesian fiscal policy argue that deficit spending will not stimulate the economy, because
higher interest rates will discourage consumption and investment. This argument is known as the:
a.
deficit-substitution effect.
c.
burden-of-debt effect.
b.
multiplier effect.
d.
crowding-out effect.
66. “Crowding out” refers to federal government deficits financed by:
a.
borrowing which increases interest rates and thereby reduces private spending.
b.
increasing taxes which reduces private spending.
c.
the federal government buying foreign debt which reduces the amount of government
spending and government programs.
d.
reducing government spending which reduces interest rates.
67. “Crowding in” refers to federal government deficits:
a.
used for public infrastructure that will offset any decline in business investment.
b.
which reduce private business and consumption spending.
c.
which reduce future rates of economic growth.
d.
all of these.
TRUE/FALSE
1. The U.S. Treasury is responsible for preparing and submitting the initial budget recommendation to
the president.
2. Between 1960 and 1997, the federal budget was never in surplus.
3. The federal budget deficit has been over 30 percent of GDP since the early 1980s.
4. The way to prevent the national debt from growing is for the budget not to be in deficit.
5. The federal government never has to pay off the national debt.
6. The debt ceiling places a legal limit on the size of the national debt.
7. When we speak of the national debt, we refer to the federal government debt only.
8. The United States has a much higher national debt as a percentage of GDP compared to other
industrialized nations.
9. Currently, the U.S. national debt is more than $20 trillion.
10. The national debt as a percentage of GDP has remained roughly constant since the end of World War
II.
11. The huge national debt of the United States is likely to lead to bankruptcy of the national government.
12. One of the problems with a growing national debt is the growing interest payments which must be paid
on that debt.
13. An increase in fiscal deficit spending financed by borrowing will increase the national debt.
14. An increase in fiscal deficit spending financed by borrowing will not affect the national debt but
decrease interest rates.
15. The percentage of the national debt held by foreigners is approximately 25 percent.
16. The entire national debt is owed to U.S. citizens.
17. Internal ownership of the debt refers to the portion of the national debt owned by government
agencies.
18. Less of the federal debt is owned by federal, state, and local governments than is owned by foreigners.
19. Bonds owned by financial institutions represent ownership of the national debt by the private sector.
20. External debt refers to the portion of the national debt owned by private individuals and internal debt
refers to that part owned by the public sector.
21. The crowding-out effect indicates that an increase in a fiscal deficit financed by borrowing will
increase interest rates and thereby crowd out some domestic investment spending.
22. An increase in a budget deficit financed by borrowing can increase interest rates and reduce
investment spending thereby creating lower rates of economic growth.
23. Increased government borrowing stimulates private borrowing because of its effect on interest rates.
24. As the investment demand curve becomes steeper, the crowding-out effect will become smaller.
ESSAY
1. Can the U.S. federal government go broke as a result of a large national debt?
2. Are we passing the national debt burden on to our children?
3. Does government borrowing crowd out private sector spending?