Barro
Chapter 12
TRUE/FALSE
1. Government can use its funds to purchase goods or transfer money to people.
2. If a household’s transfer payment less taxes is greater than zero, then government is a net source of
funds for that household.
3. A permanent increase in government purchases causes an increase in the real rate of interest.
4. A permanent increase in government purchases increases GDP.
5. A temporary increase in government purchases increases GDP.
6. A temporary increase in government expenditures will reduce gross investment.
7. From 1929 to the present, government expenditures as a ratio to GDP have risen to equal about one-
third.
8. U.S. government transfer payments in the form of unemployment insurance are equivalent to about ten
percent of GDP.
9. The largest expansions in transfer payments at the U.S. federal level have been in Social Seccurity and
Medicare.
10. Across a large sample of countries, the U.S. ratio of total government expenditure to GDP is near the
median.
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MULTIPLE CHOICE
1. The biggest category of government purchases in the US is:
a.
state and local purchases.
c.
federal government purchases.
b.
defense purchases.
d.
federal transfer payments.
2. Government transfer payment as a percentage of GDP have been:
a.
generally rising.
c.
cyclical.
b.
generally falling.
d.
constant.
3. The fastest growing part of the federal government budget since WWII is:
a.
interest payments on the debt.
c.
transfer payments.
b.
defense spending.
d.
infrastructure.
4. State and local governments purchases include:
a.
defense spending.
c.
social security retirement spending.
b.
education spending.
d.
all of the above.
5. The biggest category of state and local expenditures are:
a.
education.
c.
defense.
b.
transfer payments.
d.
none of the above.
6. State and local governments purchases are about half:
a.
interest on debt.
c.
defense.
b.
transfer payments.
d.
none of the above.
7. The government budget constraint without borrowing is:
a.
Gt + Vt = Tt + (Mt – Mt-1 )/P
c.
Gt – Vt = Tt
b.
Gt = Tt + Vt
d.
Gt – Vt = Tt – (Mt – Mt-1 )/P
8. The government budget constraint is:
a.
government purchases less transfer
payments equal revenue from money
growth less taxes.
c.
government purchases plus taxes equal
transfer payment plus revenue from
money creation.
b.
government purchases plus transfer
payments equal taxes plus revenue from
money growth.
d.
government purchases times transfer
payment equals taxes times revenue from
money creation.
9. The government’s budget constraint is:
a.
Gt + Vt = Tt + (Mt – Mt-1 )/P
c.
-Gt = Vt – Tt, if revenue from money
creation is zero.
b.
Gt + Vt – Tt = (Mt – Mt-1 )/P
d.
all of the above.
10. The government’s budget is:
a.
government purchases plus transfer
payments equal taxes plus revenue from
money creation.
c.
the negative of government equals
transfers less taxes, if revenue from
money creation is zero.
b.
government purchases plus transfers less
taxes equal revenue from money creation.
d.
all of the above.
11. If there is no revenue from money growth, then the government’s budget constraint without borrowing
is:
a.
Gt + Vt = Tt.
c.
Gt = Vt – Tt
b.
Gt = Vt + Tt.
d.
all of the above.
12. If the money supply does not change, then the government’s budget constraint without borrowing is:
a.
Gt – Vt = Tt
c.
-Gt = Vt – Tt
b.
Gt = Vt – Tt
d.
all of the above.
13. Among the government’s sources of funds are;
a.
transfer payments.
c.
government purchases.
b.
tax revenue.
d.
all of the above.
14. Among the government’s sources of funds are;
a.
transfer payments.
c.
real revenue from printing money.
b.
government purchases.
d.
all of the above.
15. Among the government’s uses of funds are;
a.
transfer payments.
c.
real revenue from printing money.
b.
tax revenue.
d.
all of the above.
16. Among the government’s uses of funds are;
a.
government purchases.
c.
real revenue from printing money.
b.
tax revenue.
d.
all of the above.
17. In the market clearing model without government borrowing, the net effect of government on
households is an increase in funds of:
a.
transfer payments times taxes.
c.
taxes less transfer payments.
b.
transfer payments plus taxes.
d.
transfer payments less taxes.
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18. If a household’s transfer payments less taxes is positive, then the government:
a.
is a net source of funds for that household.
c.
is a net drain on that household.
b.
is a net use of fund of funds for that
household.
d.
does not affect that household’s budget
constraint.
19. If a household’s transfer payments less taxes is negative, then the government:
a.
is a net source of funds for that household.
c.
is a net subsidizer of that household.
b.
is a net use of fund of funds for that
household.
d.
does not affect that household’s budget
constraint.
20. According to the market clearing model a permanent increase in government purchases causes:
a.
a decrease in consumption.
c.
an increases in real GDP.
b.
an increases in the real interest rate.
d.
all of the above.
21. According to the market clearing model a permanent increase in government purchases leads to:
a.
an increase in capital utilization.
c.
an increase in the demand for capital
services.
b.
a decrease in the supply of capita services.
d.
no change in the real rate of interest.
22. According to the market clearing model a permanent increase in government purchases causes an
increase in:
a.
real GDP.
c.
the real wage rate.
b.
the real interest rate.
d.
none of the above.
23. In the market clearing model the intertemporal substitution effect from a permanent increase in
government purchases:
a.
works through real interest rate changes.
c.
works through real interest rate and real
wage changes.
b.
works through real wage changes.
d.
does not exist because the real interest rate
and real wage rated do not change.
24. In the market clearing model a permanent decrease in government purchase will:
a.
increase consumption.
c.
increase the real wage rate.
b.
increase the real interest rate.
d.
all of the above.
25. In the market clearing model a permanent increase in government purchases does not increase the real
wage because:
a.
labor supply and labor demand increase
about the same amount.
c.
labor demand is downward sloping.
b.
labor supply is fixed.
d.
neither labor demand nor labor supply
shift due to the permanent increase in
government purchases.
26. In the market clearing model a permanent increase in government purchases does not increase the real
interest rate because:
a.
the supply of capital services and demand
for capital services increase about the
same amount.
c.
the demand for capital services is
downward sloping.
b.
neither demand for capital services nor
supply of capital services shift due to the
permanent increase in government
purchases.
d.
the supply of capital services is upward
sloping.
27. According to the market clearing model, a one unit permanent increase in government purchases
causes:
a.
GDP to rise about one unit.
c.
gross investment to fall about one unit.
b.
consumption to fall about one unit.
d.
all of the above.
28. According to the market clearing model a one unit permanent increase in government purchases
causes:
a.
no change in GDP.
c.
no change in gross investment.
b.
consumption to fall about one unit.
d.
all of the above.
29. US data since the end of the Korean war shows that permanent changes in government purchases are:
a.
acyclical as the model predicts.
c.
acyclical as opposed to the model that
predicts they will be procyclical.
b.
procyclical as the model predicts.
d.
countercyclical as opposed to the model
that predicts they will be acyclical.
30. Since the end of the Korean war, US permanent government spending has:
a.
increased as GDP has increased.
c.
had little relationship to fluctuations in
real GDP.
b.
decreased as GDP has increased.
d.
decreased when GDP decreased.
31. The model predicts that a temporary increase in government purchases causes:
a.
an increase in consumption.
c.
a reduction in gross investment.
b.
a reduction in real GDP.
d.
all of the above.
32. The model predicts that a temporary increase in government expenditures will lead to:
a.
a decrease in consumption.
c.
a decrease in GDP.
b.
an increase in investment.
d.
none of the above.
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33. People might work more during a war time temporary increase in government purchases because of:
a.
patriotism.
c.
increased investment the model predicts.
b.
the increase in the MPL as the model
predicts.
d.
all of the above.
34. People might work more during a war time temporary increase in government purchases because of:
a.
a military draft or voluntary enlistment
takes away some primary household
earners and to maintain consumption as
the model predicts, those households may
have other members work who did not
previously.
c.
increased investment leading to hire
capital stocks that increase the demand for
labor as the model predicts.
b.
the increase in the MPL leading to an
increase in the demand for labor and
increased capital utilization as the model
predicts.
d.
all of the above.
35. The real wage increase in the data during war time might be overstated as:
a.
price controls lead to understating the
price level.
c.
because capital utilization falls in war
time.
b.
labor demand is so high in war time.
d.
all of the above.
36. With a temporary change in government purchases the model predicts investment is:
a.
acyclical.
c.
countercylical.
b.
procyclical.
d.
exogenous.
37. With a permanent change in government purchases the model predicts consumption is:
a.
acyclical.
c.
countercylical.
b.
procyclical.
d.
exogenous.
38. The model predicts that a temporary decrease in government purchases causes:
a.
an increase in consumption.
c.
an increase in gross investment.
b.
a reduction in real GDP.
d.
all of the above.
39. According to the market clearing model, a one unit temporary decrease in government purchases
causes:
a.
no change in GDP.
c.
no change in the interest rate.
b.
investment to rise about one unit.
d.
all of the above.
40. According to the market clearing model, a one unit temporary decrease in government purchases
causes:
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a.
a one unit decrease in GDP.
c.
consumption to rise about one unit.
b.
gross investment to rise about one unit.
d.
all of the above.
41. The model predicts that a temporary decrease in government expenditures will lead to:
a.
an increase in real wages.
c.
a decrease in GDP.
b.
a decrease in the real interest rate.
d.
none of the above.
42. The model predicts that a temporary decrease in government purchases causes:
a.
an increase in consumption.
c.
an increase in gross investment.
b.
a reduction in real GDP.
d.
all of the above.
43. The model predicts a permanent decrease in government purchases causes:
a.
an increase consumption.
c.
an increases real GDP.
b.
an increases the real interest rate.
d.
all of the above.
44. The model predicts a permanent decrease in government purchases leads to:
a.
an increase in capital utilization.
c.
an increase in the demand for capital
services.
b.
a decrease in the supply of capita services.
d.
no change in the real rate of interest.
45. According to the model a permanent decrease in government purchases does not increase the real wage
according to the market clearing model because:
a.
labor supply and labor demand decrease
about the same amount.
c.
labor demand is downward sloping.
b.
labor supply is fixed.
d.
neither labor demand nor labor supply
shift due to the permanent increase in
government purchases.
46. According to the model a permanent decrease in government purchases does not decrease the real
interest rate according to the market clearing model because:
a.
the supply of capital services and demand
for capital services decrease about the
same amount.
c.
the demand for capital services is
downward sloping.
b.
neither demand for capital services nor
supply of capital services shift due to the
permanent increase in government
purchases.
d.
the supply of capital services is upward
sloping.
47. A temporary decrease in government purchases does not increase the real wage according to the
market clearing model because:
a.
labor supply and labor demand decrease
about the same amount.
c.
labor demand is downward sloping.
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b.
labor supply is fixed.
d.
neither labor demand nor labor supply
shift due to the permanent increase in
government purchases.
48. A temporary decrease in government purchases does not decrease the real interest rate according to the
market clearing model because:
a.
the supply of capital services and demand
for capital services decrease about the
same amount.
c.
the demand for capital services is
downward sloping.
b.
neither demand for capital services nor
supply of capital services shift due to the
permanent increase in government
purchases.
d.
the supply of capital services is upward
sloping.
49. A temporary increase in government purchases does not increase the real wage according to the market
clearing model because:
a.
labor supply and labor demand increase
about the same amount.
c.
labor demand is downward sloping.
b.
labor supply is fixed.
d.
neither labor demand nor labor supply
shift due to the permanent increase in
government purchases.
50. A temporary increase in government purchases does not increase the real interest rate according to the
market clearing model because:
a.
the supply of capital services and demand
for capital services increase about the
same amount.
c.
the demand for capital services is
downward sloping.
b.
neither demand for capital services nor
supply of capital services shift due to the
permanent increase in government
purchases.
d.
the supply of capital services is upward
sloping.
51. Goernment expediture as a ratio to GDP since the 1980s has
a.
stabilized at about 1/3.
c.
grown from about 1/3 to 1/2.
b.
grown from about 1/10 to 1/5.
d.
declined from about 1/3 to 1/5.
52. Data across more than 50 countries shows that the U.S. ratio of government expediture to GDP is
a.
much higher than the median ratio.
c.
slightly below the median ratio.
b.
one of the two highest ratios.
d.
one of the two lowest ratios.
53. At the federal level, the largest expansions in transfer payments have been from increases in
a.
unemployment insurance
c.
welfare.
b.
Social Security.
d.
tax rebates.
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54. U.S. data show that the ratio of Social Security, Medicare and state and local Medicaid payments to
GDP is
a.
less than 1%.
c.
about 50%.
b.
more than 98%.
d.
about 10%.
55. When the Barro model assumes lump-sum taxes, this means
a.
real taxes are independent of a
household’s income.
c.
nominal taxes depend negatively on a
household’s consumption.
b.
nominal taxes depend positively on a
household’s income.
d.
there is no tax on inheritances.
56. Suppose real government purchases equal $800 billion and real government transfers equal $100
billion. If the nominal quantity of money is constant, then real tax revenues must
a.
equal $700 billion.
c.
be greater than $8,100 billion.
b.
equal $900 billion.
d.
be less than $100 billion.
57. Real disposable income for a household equals
a.
the real return on capital services.
c.
real income available after taxes.
b.
the nominal wage rate.
d.
the real return on capital services after
taxes.
58. If a household’s real taxes increase by one unit, then
a.
real government transfers to the household
decreae by one unit.
c.
the real return on capital services falls by
one unit.
b.
real government transfers to the
househould increase by one unit.
d.
real disposable income falls by one unit.
59. Adding government to the Barro model affects the household budget constraint by
a.
adding the present value of real transfers
net of real taxes as a source of funds.
c.
adding the present value of real transfers
plus real taxes as a use of funds.
b.
adding and subtracting the present value
of real transfers net of real taxes as a
source of funds, for no net effect.
d.
subtracting the present value of real
transfers net of real taxes as a use of
funds.
60. A permanent increase in government purchases will
a.
shift the demand for capital services
outward.
c.
shift the supply of capital services inward.
b.
not shift the demand or supply of capital
services.
d.
shift the supply of capital services
outward.
61. A permanent increase in government purchases will
a.
shift the demand curve for labor invward.
c.
not shift the supply or demand curves for
labor.
b.
shift the supply curve for labor outward..
d.
shift the demand curve for labor outward.
62. One empirical prediction from the model which includes government purchases is that
a.
permanent changes in real government
purchases increase real GDP.
c.
permanent changes in nominal
government purchases increase nominal
GDP.
b.
permanent changes in real government
purchases decrease real GDP.
d.
permanent changes in real government
purchases have little impact on real GDP.
63. One difference between a permanent and temporary increase in government purchases is that with a
temporary increase,
a.
expected real disposable income in future
years is unchanged.
c.
the expected real wage rate in future years
is higher.
b.
expected real disposable income in future
years is higher.
d.
the expected real wage rate in future years
is lower.
64. A temporary increase in government purchases, unlike a permanent increase,
a.
comes mostly at the expense of a loss of
transfer payments.
c.
increases the real wage rate in future
years..
b.
comes mostly at the expense of a loss in
gross investment.
d.
comes mostly at the expense of a lower
real interest rate.
65. The data on temporary increases in government purchases during wartime
a.
do not support the prediction that gross
investment would rise.
c.
do not support the prediction that GDP
would be unchanged.
b.
do not support the prediction that
consumption would rise.
d.
do support the prediction that GDP would
be unchanged.
SHORT ANSWER
1. What is the government’s budget constraint without government borrowing and what does it show us?
2. How does government without borrowing affect the household’s budget constraint?
3. What are the effects of a permanent increase in government purchases in the market clearing model?
4. What are the effects of a temporary increase in government purchases?
5. What has been the US experience in war time temporary increase in government purchases and how
do they conform with the predictions of the model?