Chapter 14
Deficit Spending and the Public Debt
14.1 Public Deficits and Debts: Flows versus Stocks
1) In the current year, a nation s government spending equals $1.5 trillion and its revenues are $1.9
trillion. Which of the following is true?
A) The nation s national debt equals $0.4 trillion.
B) This nation has a current year budget surplus of $0.4 trillion.
C) This nation is currently running a budget deficit of $0.4 trillion.
D) The nation has a current year trade surplus of $0.4 trillion.
2) When government revenues exceed government outlays in a particular year, this is called
A) a budget surplus. B) a budget deficit.
C) the national debt. D) fiscal policy.
3) Suppose that the government of Springfield spends $2 trillion in 2011 and receives tax revenues
of $1.5 trillion. Which of the following is true?
A) Springfield has a budget surplus of $0.5 trillion.
B) Springfield has a budget deficit of $0.5 trillion.
C) Springfield has a trade deficit of $0.5 trillion.
D) Springfield has a trade surplus of $0.5 trillion.
4) When government spending exceeds government revenues during a given period of time,
A) a budget deficit exists. B) a budget surplus exists.
C) the national debt must be decreasing. D) Congress is obliged to raise taxes.
5) How does a government budget deficit occur?
A) A government s tax revenues exceed its spending.
B) A government s spending exceeds its tax revenues.
C) If a nation carries a public debt, it must be running a deficit every year.
D) A nation earns more on exports than it spends on imports.
6) Stocks change ________ whereas flows relate to ________.
A) within a given period of time; changes between points in time
B) only at the end of each year; amounts at a given point in time
C)
b
etween points in time; changes within a given time period
D) and that causes flows to change; changes that have no impact on stocks
7) Which of the following is NOT an example of a flow variable?
A) planned investment B) capital stock
C) The federal deficit D) inventory investment
8) If the government s spending exactly equals its revenues during a budget year, that government
is
A) running a budget deficit. B) experiencing a budget surplus.
C)
b
alancing its budget. D) paying off its public debt.
9) Which of the following is a stock variable?
A) public debt B) wealth
C) money supply D) all of the above
10) How does the federal government finance a budget deficit?
A) It redeems its IOUs.
B) It purchases U.S. Treasury bonds.
C) It cuts spending on entitlement programs.
D) It borrows funds by selling Treasury bonds.
11) Other things being equal, during a period when the federal government issues more Treasury
securities to borrow funds,
A) the flow of government expenditures during that period must exceed the flow of tax
revenues.
B) the flow of government expenditures during that period must exceed the stock of tax
collections.
C) the stock of government deficit spending during that period must exceed the flow of tax
revenues.
D) the stock of government deficit spending during that period must exceed the stock of tax
collections.
12) If the public debt increased by the same amount each year during the past three years, then
A) the U.S. government must have operated with the same budget surpluses during the past
three years.
B) the U.S. government must have experienced budget surpluses that increased by the same
amount each of the past three years.
C) the U.S. Treasury must have issued securities to fund a flow of government spending that
exceeded a flow of tax revenues by the same amount during each of the past three years.
D) during each of the past three years, the U.S. Treasury must have bought back the same
amount of securities that had previously been issued to cover deficits experienced more
than three years ago.
13) The total value of all outstanding federal government securities is
A) a flow variable. B) the budget deficit.
C) total personal wealth. D) none of the above.
14) A government budget deficit is
A) an excess of government spending over government revenues during a given time period.
B) a situation in which the government s spending is exactly equal to the total taxes and other
revenues it collects during a given time period.
C) the total value of all outstanding federal government securities.
D) all federal government debt irrespective of who owns it.
15) If the government spends more than it receives in taxes during a given interval, then the result
is
A) a balanced budget. B) the gross public debt.
C) the net public debt. D) a government budget deficit.
16) Which of the following statements about the budget deficit is true?
A) It is a stock variable. B) It is a flow variable.
C) It is equal to the public debt. D) None of the above.
17) A federal deficit of $300 billion means that
A) the government has a total debt of $300 billion.
B) government spending is $300 billion a year.
C) the government is spending $300 billion a year more than it is collecting in taxes.
D) the government plans on collecting $300 billion in taxes this year.
18) A government balanced budget is
A) an excess of government spending over government revenues during a given time period.
B) a situation in which the government s spending is exactly equal to the total taxes and other
revenues it collects during a given time period.
C) the total value of all outstanding federal government securities.
D) all federal government debt irrespective of who owns it.
19) If the government spends exactly what it receives in taxes during a given interval, then the
result is
A) a balanced budget. B) the gross public debt.
C) the net public debt. D) a government budget deficit.
20) If the government spends less than what it receives in taxes during a given interval, then the
result is
A) a balanced budget. B) an entitlement.
C) unrealized public debt. D) a government budget surplus.
21) A government budget surplus is
A) a situation in which the supply of goods in the economy is greater than the demand for
goods.
B) a situation in which the amount spent by the government is greater than the amount
collected in taxes.
C) the public debt.
D) an excess of revenues over government spending.
22) The public debt is
A) an excess of government spending over government revenues during a given time period.
B) a situation in which the government s spending is exactly equal to the total taxes and other
revenues it collects during a given time period.
C) the total value of all outstanding federal government securities.
D) all federal government debt irrespective of who owns it.
23) Which of the following statements about the public debt is true?
A) It is a stock variable.
B) It is equal to the budget deficit.
C) It decreases when the government runs a budget deficit.
D) All of the above.
24) The public debt can be thought of as
A) the total amount consumers owe on their credit cards.
B) the total amount in taxes consumers pay to the government.
C) accumulated budget deficits and surpluses.
D) the total amount the government spends for goods and services.
25) Which of the following statements is true about the difference between the public debt and the
government budget deficit?
A) The public debt always increases while the government budget deficit may increase or
decrease.
B) The public debt for this year will increase or decrease depending upon whether there is a
government budget deficit or a government budget surplus.
C) The public debt is a flow measure and the government budget deficit is not a flow
measure.
D) There is no relationship between the public debt and the government budget deficit since
one is a stock measure and the other is a flow measure.
26) Which of the following will NOT cause the public debt to change?
A) Collection by the government of $200 billion more in taxes than it spends
B) Government budget deficit
C) Government budget surplus
D) Balanced budget
27) Public debt is held as
A) corporate bonds and common stocks of the largest companies.
B) Federal Reserve Notes.
C) U.S. Notes.
D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.
28) Which of the following is true when a budget deficit exists?
A) Government expenditures exceed tax revenues.
B) Tax revenues exceed government expenditures.
C) A trade surplus exists.
D) Dissaving exists.
29) A government budget deficit occurs during a budget year when
A) tax revenues government spending.
B) tax revenues government spending.
C) tax revenues government spending.
D) tax revenues government spending personal consumption.
30) A government budget surplus occurs during a budget year when
A) tax revenues government spending.
B) tax revenues government spending.
C) tax revenues government spending.
D) tax revenues government spending personal income.
31) If the government has a spending flow that exceeds the revenues it collects, the government will
run a ________ that year.
A) debt B) deficit
C) debt and a deficit D) surplus
32) While the budget deficit represents a ________, the public debt represents a ________.
A) flow; flow B) flow; stock C) stock; stock D) stock; flow
33) When government spending exceeds tax revenues during a specific time period, this is known
as a
A) government budget deficit. B) government budget surplus.
C)
b
alanced budget. D) public debt.
34) When government spending is less than the tax revenues during a specific time period, this is
known as a
A) government budget deficit. B) government budget surplus.
C)
b
alanced budget. D) public debt.
35) When government spending is equal to the tax revenues during a specific time period, this is
known as a
A) government budget deficit. B) government budget surplus.
C)
b
alanced budget. D) public debt.
36) When government expenditures are greater than tax revenues
A) there will be budget deficit. B) there will be budget surplus.
C) automatic stabilizers do not kick in. D) the public debt will be reduced.
37) Suppose that the federal government had a budget deficit of $80 billion in year 1 and $90 billion
in year 2, but that it experiences budget surpluses of $40 billion in year 3 and $20 billion in year
4. Also assume that the government uses any budget surpluses to pay down the public debt. At
the end of these four years, the Federal government s public debt would have
A) decreased by $110 billion. B) increased by $230 billion.
C) increased by $110 billion. D) decreased by $57.5 billion.
38) Suppose that the federal government had a budget deficit of $80 billion in year 1 and $10 billion
in year 2, but it had budget surpluses of $140 billion in year 3 and $20 billion in year 4. Also
assume that the government uses any budget surpluses to pay down the public debt. At the end
of these four years, the Federal government s public debt would have
A) decreased by $70 billion. B) increased by $250 billion.
C) increased by $70 billion. D) decreased by $62.5 billion.
39) If the government has no debt initially, but then has annual revenues of $10
b
illion per year for
4 years and annual expenditures of $10.5 billion per year for 4 years, then the government has
A) a budget surplus of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.
B) a budget deficit of $0.5 billion per year and a budget surplus of $2 billion at the end of the
4 years.
C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.
D) a budget surplus of $0.5 billion per year and a surplus of $2 billion at the end of the 4
years.
40) Explain the differences between the public debt and the government budget deficit.
14.2 Government Finance: Spending More Than Tax Collections
1) Since 2001, the U.S. government budget deficit
A) has been approximately equal to 10% of U.S. GDP.
B) as a percentage of U.S. GDP has increased steadily each year.
C) as a percentage of U.S. GDP has decreased steadily each year.
D) none of the above.
2) When was the last year the United States had a budget surplus?
A) 2009 B) 1984 C) 1993 D) 2001
3) Since 1940, the U.S. government has experienced
A) about the same number of years with budget deficits as with budget surpluses.
B) twice as many annual budget surpluses as annual budget deficits.
C) only one year with a budget surplus.
D) many more budget deficits than budget surpluses.
4) Expressing the U.S. federal budget deficit as a percentage of Gross Domestic Product (GDP)
A) results in inflation adjusted revenue and expenditure numbers.
B) helps us understand the size of the deficit relative to the size of the economy.
C) was useful through the 1980s, but is no longer helpful because both the deficit and real
Gross Domestic Product (GDP) have grown so large.
D) is only useful if the budget deficit is rising at an annual rate of more than 4 percent.
5) What is true about government budget deficits and surpluses since 1940?
A) Balanced budgets have been more common than government budget deficits or
government budget surpluses.
B) There have been more government budget surpluses than government budget deficits.
C) There have been more government budget deficits than government budget surpluses.
D) The number of government budget deficits is about the same as the number of
government budget surpluses.
6) Between the years 1998 and 2001, the U.S. government experienced
A)
b
udget surpluses. B)
b
alanced budgets.
C)
b
udget deficits. D) contractionary budget cycles.
7) All of the following are possible explanations for the increase in U.S. government budget deficits
as a percentage of GDP since the early 2001 EXCEPT
A) increases in tax revenues. B) increases in payments for entitlements.
C) increases in government spending. D) decreases in tax rates.
14.3 Evaluating the Rising Public Debt
1) The difference between net public debt and gross public debt is
A) all government interagency borrowing.
B) the interest paid annually on the public debt.
C) the amount owed to individuals and firms outside the United States.
D) the current year s budget deficit from the amount of public debt at the start of the year.
2) The total value of all outstanding federal government securities is called
A) the budget deficit. B) the public debt.
C) the trade deficit. D) crowding out.
3) According to the text, approximately what percentage of U.S. net public debt is held by foreign
residents?
A) 20% B) 50% C) 800% D) 90%
4) According to the text, the net public debt to Gross Domestic Product (GDP) ratio is currently
about
A) 10%. B) 25%. C) 60%. D) 120%.
5) Net public debt is the
A) difference between tax revenues and government expenditures each year.
B) sum of accumulated government deficits and surpluses held by individuals and
businesses and foreign institutions.
C) sum of accumulated government deficits and surpluses held by U.S. government agencies.
D) sum of accumulated government deficits and surpluses held by large money center banks.
6) The amount of funds the Social Security system has loaned the federal government is
A) included in the net public debt.
B) added to the gross public debt to calculate the net public debt.
C) not included in the gross public debt.
D) excluded from the net public debt.
7) Since the late 1980s, the share of the net public debt owed to foreign interests has
A) remained constant.
B) decreased.
C) increased.
D) gone up and then down, finally settling at around 10 percent.
8) If the government borrows to purchase goods and services, today s consumption of government
goods and services will be paid for by
A) today s taxpayers.
B) government employees.
C) future taxpayers.
D) today s taxpayers and tomorrow s taxpayers in even shares.
9) Other things being equal, what is the effect of deficit spending on credit markets?
A) Both the demand for credit and the supply of credit will increase.
B) Both the demand for credit and the supply of credit will decrease.
C) The demand for credit increases while the supply of credit remains constant.
D) The supply of credit will increase while the demand for credit remains the same.
10) Other things being equal, what is the effect of deficit spending on interest rates?
A) Interest rates decline.
B) Interest rates rise.
C) Interest rates hold constant because the demand for credit decreases.
D) There is no impact unless the Federal Reserve decides to alter the money supply.
11) Ceteris paribus
,
deficit spending results in higher interest rates, which can
A) accelerate growth in investment spending.
B) ultimately have a positive impact on productivity gains and society s standard of living.
C) increase the wealth of future generations.
D) crowd out private investment.
12) Gross public debt is
A) an excess of government spending over government revenues during a given time period.
B) a situation in which the government s spending is exactly equal to the total taxes and other
revenues it collects during a given time period.
C) the total value of budget deficits plus budget surpluses over the past five years.
D) all federal government debt irrespective of who owns it.
13) The difference between the gross public debt and the net public debt is
A) the sum of all previously accumulated government budget deficits and surpluses.
B) the sum of all previously issued U.S. government securities that have been purchased by
foreign residents.
C) all private sector borrowing from private sources.
D) all government interagency borrowing.
14) Net public debt is
A) all federal public debt irrespective of who owns it.
B) gross public debt minus all government interagency borrowing.
C) all public debt minus all money owed on the federal income tax.
D) all public debt plus all government interagency borrowing.
15) If no foreign residents owned any of the U.S. public debt, then it would be true that
A) there would be no distributional consequences associates with he public debt.
B) U.S. residents would essentially owe the public debt to themselves.
C) there would be no interest payments on the public debt.
D) the public debt would naturally disappear over time.
16) Gross public debt minus all government interagency borrowing is
A) government budget deficit. B) net public debt.
C) U.S. Treasury bonds. D) an entitlement.
17) When the Social Security Administration holds U.S. Treasury Bonds
A) interagency borrowing has occurred and the government owes itself.
B) there is a balanced budget.
C) an entitlement has occurred.
D) the gross public debt has increased.
18) The difference between the gross public debt and the net public debt is that the
A) gross public debt includes entitlements while the net public debt does not.
B) gross public debt is based on budget deficit while the net public debt is not based on
budget deficits.
C) gross public debt includes government interagency borrowing while the net public debt
does not.
D) the gross public debt is expressed as a percentage of GDP while the net public debt is not.
19) Which of the following is the best statement about how the amount of the net public debt that a
typical individual owes to the holders of the debt has varied in the recent past?
A) The amount has not varied much over time.
B) The amount has varied a lot over time.
C) The amount has steadily increased over time.
D) The amount has steadily decreased over time.
20) Some economists believe that financing deficit spending by increasing taxes will lead to a lower
level of national consumption and a higher level of national savings than deficit spending. The
reason is
A) people believe that they can consume the government provided goods and have future
generations pay the bill.
B) that people do not realize that taxes have increased also.
C) people will forgo private consumption now as society substitutes government goods for
private goods.
D) the interest rate on the debt will increase.
21) Assume the economy is closed and that it is operating at full employment. Which statement is
true when the size of the budget deficit decreases?
A) The interest rate will decrease, leading to an increase in investment and capital formation.
B) Demand and supply of credit will increase.
C) A reduction in the growth of productivity, and a reduction in society s standard of living
will occur.
D) The increased amount of public goods will crowd out privately produced goods.
22) Some economists believe that deficit spending can impose a burden on future generations.
Which of the following does NOT explain the burden?
A) Investment will be crowded out by an increase in current consumption.
B) Deficit spending that is allocated to purchases leads to long term increases in real GDP.
C) Future generations will have a smaller capital stock that will reduce their wealth.
D) Future generations will have to be taxed at a higher rate.
23) Which of the following statements is true about the public debt and future generations?
A) Future generations will always be worse off because they will have to pay off the public
debt.
B) Increased consumption today will lead to increases in the capital stock in the future.
C) Future generations may be better off if the rate of return on the borrowed funds is higher
than the interest rate paid to foreign residents.
D) The public debt cannot be held by foreign residents therefore we really owe the debt to
ourselves.
24) The difference between gross public debt and net public debt is that
A) net public debt includes interagency borrowing while the gross domestic product debt
does not.
B) net public debt is expressed in real terms while gross public debt is expressed in nominal
terms.
C) gross public debt includes interagency borrowing while net public debt does not.
D) gross public debt is held by individuals while net public debt is held by the government.
25) An increase in the public debt would most likely indicate that
A) the budget deficit has increased. B) the budget deficit has decreased.
C) the trade deficit has decreased. D) national saving has increased.
26) The share of net public debt owed to foreign residents today is close to
A) 100 percent. B) 80 percent. C) 50 percent. D) 10 percent.
27) Media reports often suggest that the increasing public debt is a burden on future generations.
What they mean is that
A) it reduces the current level of investment.
B) it makes predicting future unemployment levels unpredictable.
C) it causes deflation.
D) it reduces both nominal and real interest rates.
Year Expenditures Tax Revenues GDP
1 400 375 5,000
2 290 330 5,300
3 430 320 5,600
4 470 350 6,000
28) Suppose that initially there is no public debt. Using the above table, the public debt over this
four year period would have
A) increased by $215. B) decreased by $100.
C) increased by $1,375. D) decreased by $1,590.