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Six Debates over Macroeconomic Policy 8783
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.
8784 Six Debates over Macroeconomic Policy
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.
Six Debates over Macroeconomic Policy 8785
18. In 2012 the federal debt was about
a. 11.3 trillion
b. 9.3 trillion
c. 1.13 trillion
d. 930 billion
19. The average person's share of the U.S. government debt as a percentage of lifetime income is
a. less than 2 percent.
b. about 5 percent.
c. about 10 percent.
d. over 12 percent.
8786 Six Debates over Macroeconomic Policy
20. Which of the following statements is not true?
a. The U.S. has sometimes run budget deficits during times when it was not fighting war and the
economy was expanding.
b. The U.S. federal debt in 2012 was about $11.3 trillion.
c. Government debt per person represents more than 5 percent of a typical worker’s lifetime
resources.
d. Forward-looking parents can reverse adverse effects of government debt on their children.
21. The average person's share of the U.S. government debt as a percentage of lifetime income is
a. less than 1 percent.
b. more than 1 percent but less than 2 percent
c. about 4 percent
d. over 6 percent
Six Debates over Macroeconomic Policy 8787
22. 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.
23. 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.
8788 Six Debates over Macroeconomic Policy
24. 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
25. 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
Six Debates over Macroeconomic Policy 8789
26. 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%
27. 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
8790 Six Debates over Macroeconomic Policy
28. 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.
29. 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
Six Debates over Macroeconomic Policy 8791
30. 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
31. 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
8792 Six Debates over Macroeconomic Policy
32. 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
33. 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
Six Debates over Macroeconomic Policy 8793
34. 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%.
35. 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.
8794 Six Debates over Macroeconomic Policy
36. 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.
37. 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.
Six Debates over Macroeconomic Policy 8795
38. 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
39. 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
8796 Six Debates over Macroeconomic Policy
40. 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
41. 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
Six Debates over Macroeconomic Policy 8797
42. 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.
43. 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.
8798 Six Debates over Macroeconomic Policy
44. 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.
45. 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.
Six Debates over Macroeconomic Policy 8799
Multiple Choice – Section 06: Should the Tax Laws Be Reformed to Encourage Saving?
1. Higher saving is associated with
a. a larger capital stock and a higher standard of living.
b. a larger capital stock but not a higher standard of living.
c. a higher standard of living but not a larger capital stock.
d. neither a higher standard of living nor a higher capital stock.
2. Higher saving is associated with
a. a larger capital stock and higher productivity.
b. a larger capital stock but not higher productivity.
c. higher productivity but not a higher capital stock.
d. neither a higher capital stock nor higher productivity.
3. A reduction in the tax rate on income from saving would
a. most directly benefit the poor in the short run.
b. increase real wages over time.
c. decrease the capital stock over time.
d. decrease productivity over time.
8800 Six Debates over Macroeconomic Policy
4. Reforming tax laws to encourage saving is motivated by which of the Ten Principles of
Economics from Chapter 1?
a. The cost of something is what you give up to get it (Principle 2).
b. Trade can make everyone better off (Principle 5).
c. Markets are usually a good way to organize economic activity (Principle 6).
d. A country’s standard of living depends on its ability to produce goods and services (Principle 8).
5. Policies that reduce the incentive for households to save include
a. means-testing.
b. College and university financial aid administration.
c. inheritance taxes.
d. All of the above.
6. Which of the following raise the incentive for households to save?
a. means-testing of government benefits and inheritance taxes
b. means-testing of government benefits but not inheritance taxes
c. inheritance taxes, but not means-testing of government benefits
d. neither means-testing of government benefits nor inheritance taxes
Six Debates over Macroeconomic Policy 8801
7. Which of the following reduce the incentive for households to save?
a. both means-testing of government benefits and inheritance taxes
b. means-testing of government benefits but not inheritance taxes
c. inheritance taxes, but not means-testing of government benefits
d. neither means-testing of government benefits nor inheritance taxes
8. Means-tested government benefits base benefits on
a. a household’s wealth and are an incentive to save.
b. a household’s wealth and are a disincentive to save.
c. the current interest rate and are an incentive to save.
d. the current interest rate and are a disincentive to save.
9. Means-tested college aid, base college aid primarily on
a. a student’s abilities, and create an incentive to save.
b. a student’s abilities but create a disincentive to save.
c. the current interest rate and are an incentive to save.
d. the current interest rate and are a disincentive to save.
8802 Six Debates over Macroeconomic Policy
10. Accumulated over a long span of time, the tax rate on interest income
a. removes all benefits from saving.
b. reduces the benefits from saving by a small amount.
c. reduces the benefits from saving by a large amount.
d. does nor reduce any of the benefits from saving.
11. Which of the following is correct?
a. No forms of capital income are taxed twice.
b. The tax code cannot be rewritten to provide greater incentive to save.
c. Means-tested benefits increase the incentive to save.
d. There is a correlation between national savings rates and measures of economic well-being.
12. Which of the following are taxed?
a. both corporate profits and dividends paid to stockholders
b. corporate profits but not dividends paid to stockholders
c. dividends paid to stockholders but not corporate profits
d. neither corporate profits nor dividends paid to stock holders
