Barro
Chapter 14
TRUE/FALSE
1. When a country has a deficit, its debt is growing.
2. A pay as you go social security system raises the capital stock.
3. If government budget is in deficit, then real government saving is in surplus.
4. If the government runs a deficit, households will feel wealthier.
5. A budget deficit caused by changing labor income taxes changes the labor and production.
6. The debt-to–GDP ratio typically rises during a recession.
7. The major peaks in the ratio of public debt to GDP in the U.S. reflect expenditures on Social Security.
8. Real national saving equals net investment.
9. Real government saving is positive when the real public debt increases.
10. If government expediture exceeds government revenue, then the government has a budget surplus.
MULTIPLE CHOICE
1. The governments sources of funds include:
a.
taxes.
c.
borrowing.
b.
printing money.
d.
all of the above.
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2. The governments sources of funds include:
a.
taxes.
c.
paying interest on past bonds.
b.
government purchases.
d.
all of the above.
3. The governments sources of funds include:
a.
transfer payments.
c.
paying interest on the government debt.
b.
printing money.
d.
all of the above.
4. The governments sources of funds include:
a.
government purchases.
c.
borrowing.
b.
transfer payments.
d.
all of the above.
5. The governments uses of funds include:
a.
government purchases.
c.
paying interest on the past government
debt.
b.
transfer payments.
d.
all of the above.
6. The governments uses of funds include:
a.
government purchases.
c.
printing money.
b.
borrowing.
d.
all of the above.
7. The governments uses of funds include:
a.
printing money.
c.
taxes.
b.
transfer payments.
d.
all of the above.
8. The governments uses of funds include:
a.
borrowing.
c.
paying interest on the past government
debt.
b.
printing money.
d.
all of the above.
9. A balanced government budget is one where:
a.
government purchases equal taxes.
c.
the governments real savings is zero.
b.
government debt is zero.
d.
all of the above.
10. Total bond holding of all households is Bgt because:
a.
the quantity of all private bonds held by
the public is zero.
c.
the public views government bonds as less
risky than private bonds.
b.
the quantity of all government bonds held
by the public is zero.
d.
the public views private bonds as less
risky than government bonds.
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11. Total bond holding of all households is equal to
a.
the quantity of all private bonds.
c.
the quantity of all private bonds plus all
government bonds.
b.
the quantity of all government bonds.
d.
the quantity of all private bonds minus all
government bonds.
12. If money and the price level are constant, then the government’s real budget deficit is:
a.
(Bgt – Bgt-1)/P.
c.
(Bt + Bgt)/P.
b.
Bgt/P.
d.
none of the above.
13. If money and the price level are constant, then the government’s real budget debt is:
a.
(Bgt – Bgt-1)/P.
c.
(Bt + Bgt)/P.
b.
Bgt/P.
d.
none of the above.
14. If the government reduces taxes by $1 this year without raising taxes or printing more money, then
a.
future tax liabilities will rise by $1 plus
the interest, R, that must be paid on the
borrowing.
c.
future tax liabilities will fall by $1 plus the
interest, R, that must be paid on the
borrowing.
b.
future tax liabilities will rise by $1 less the
interest, R, that must be paid on the
borrowing.
d.
future tax liabilities will fall by $1 less the
interest, R, that must be paid on the
borrowing.
15. Ricardian equivalence implies that a government budget deficit:
a.
increases current consumption.
c.
reduces national saving.
b.
increases future tax liabilities.
d.
all of the above.
16. Ricardian equivalence holds:
a.
only for year to year changes in the
governments budget.
c.
only with a government deficit not a
surplus.
b.
no matter how long until the bonds are to
be paid off.
d.
only with a government surplus not a
deficit.
17. A strategic budget deficit is designed to:
a.
increase GDP.
c.
constrain the behavior of future
governments.
b.
increase economic activity.
d.
all of the above.
18. The standard view of the budget deficit is that it:
a.
reduces the GDP in the long run.
c.
reduces the capital stock in the long run.
b.
reduces investment.
d.
all of the above.
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19. The standard view of the budget deficit is that it:
a.
reduces the GDP in the long run.
c.
increases the capital stock in the long run.
b.
increases investment.
d.
all of the above.
20. The standard view of the budget deficit is that it:
a.
increases the GDP in the long run.
c.
increases the capital stock in the long run.
b.
reduces investment.
d.
all of the above.
21. The standard view of the budget deficit is that it:
a.
increases the GDP in the long run.
c.
reduces the capital stock in the long run.
b.
increases investment.
d.
all of the above.
22. The standard view of the budget deficit is that a deficit:
a.
does not affect the economy in the long
run.
c.
does not affect the economy in the short
run.
b.
and the public debt are a burden on the
economy.
d.
encourages economic growth.
23. Households may feel wealthier due to a tax cut, if:
a.
they are very concerned about future
generations.
c.
they are using an infinite planning
horizon.
b.
they expect the bonds created by the
deficit to be paid off after their lifetime.
d.
they plan to leave a bequest to their heirs.
24. Households may feel wealthier due to a tax cut, if:
a.
they are not able to borrow as much
against future earnings as they wish.
c.
they care a lot about future generations.
b.
they are not able to lend present earnings
as much as they wish.
d.
they plan to leave a bequest to their heirs.
25. If households ignore effects on future generations, a pay as you go social security system:
a.
reduces current national savings.
c.
reduces the future capital stock.
b.
reduces investment.
d.
all of the above.
26. If households ignore effects on future generations, a pay as you go social security system:
a.
reduces current national savings.
c.
raises the future capital stock.
b.
raises investment.
d.
all of the above.
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27. If households ignore effects on future generations, a pay as you go social security system:
a.
raises current national savings.
c.
raises the future capital stock.
b.
reduces investment.
d.
all of the above.
28. If households ignore effects on future generations, a pay as you go social security system:
a.
raises current national savings.
c.
reduces the future capital stock.
b.
raises investment.
d.
all of the above.
29. If households ignore effects on future generations when a pay as you go social security system starts,
the then elderly:
a.
have a positive income effect on their
consumption.
c.
receive low returns on any taxes paid into
the system.
b.
receive benefits that in present value is
less the present value of their
contributions.
d.
all of the above.
30. If households ignore effects on future generations, when a pay as you go social security system starts,
the then elderly:
a.
have a negative income effect on their
consumption.
c.
receive low returns on any taxes paid into
the system.
b.
receive benefits that in present value is
greater than the present value of their
contributions to the system.
d.
all of the above.
31. If households ignore effects on future generations, a pay as you go social security system:
a.
increases consumption.
c.
reduces national saving.
b.
reduces the capital stock in the long run.
d.
all of the above.
32. If households ignore effects on future generations, a pay as you go social security system:
a.
increases consumption.
c.
increases national saving.
b.
increases the capital stock in the long run.
d.
all of the above.
33. If households ignore effects on future generations, a pay as you go social security system:
a.
decreases consumption.
c.
raises national saving.
b.
reduces the capital stock in the long run.
d.
all of the above.
34. If households ignore effects on future generations, a pay as you go social security system:
a.
decreases consumption.
c.
reduces national saving.
b.
increases the capital stock in the long run.
d.
all of the above.
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35. If households ignore effects on future generations, a pay as you go social security system:
a.
reduces investment.
c.
reduces private saving.
b.
reduces GDP in the long run.
d.
all of the above.
36. If households ignore effects on future generations, a pay as you go social security system:
a.
reduces investment.
c.
increases private saving.
b.
increases GDP in the long run.
d.
all of the above.
37. If households ignore effects on future generations, a pay as you go social security system:
a.
raises investment.
c.
raises private saving.
b.
reduces GDP in the long run.
d.
all of the above.
38. If households ignore effects on future generations, a pay as you go social security system:
a.
raises investment.
c.
reduces private saving.
b.
increases GDP in the long run.
d.
all of the above.
39. A pay as you go social security system only increase consumption and reduces investment, if:
a.
households leave bequests.
c.
if the planning horizon is overlapping
generations.
b.
if households neglect the adverse affects
on their descendants.
d.
households increase their savings.
40. If currently alive households take full account of the negative affects of a pay as you go social security
system on their descendants, then the:
a.
effects are magnified.
c.
effects are exponential.
b.
effects are nil.
d.
effects are unchanged.
41. Open market operations amount to:
a.
printing more money and raising taxes and
lowering taxes and raising the public debt.
c.
printing more money and raising taxes and
lowering taxes and raising the public debt.
b.
printing less money and reducing taxes
and raising taxes and reducing the public
debt.
d.
printing more money and reducing taxes
and raising taxes and reducing the public
debt.
42. By varying its budget deficit, a government can:
a.
change the timing of taxes.
c.
avoid accumulation of government debt.
b.
avoid having to raise taxes to pay for a
deficit.
d.
all of the above.
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43. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
real GDP does not change.
c.
real gross investment does not change.
b.
real consumption does not change.
d.
all of the above.
44. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
real GDP does not change.
c.
real gross investment falls.
b.
real consumption increases.
d.
all of the above.
45. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
real GDP does rise.
c.
real gross investment rises.
b.
real consumption does not change.
d.
all of the above.
46. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
real GDP falls.
c.
real gross investment does not change.
b.
real consumption falls.
d.
all of the above.
47. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
the interest rate does not change.
c.
the future capital stock does not change.
b.
the real wage rate does not change.
d.
all of the above.
48. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
the interest rate rises.
c.
the future capital stock does not change.
b.
the real wage rate falls.
d.
all of the above.
49. If the time path of government purchases does not change and the government cuts lump sum taxes,
then:
a.
the interest rate does not change.
c.
the future capital stock falls.
b.
the real wage rate rises.
d.
all of the above.
50. If the time path of government purchases does not change and the government cuts current labor
income taxes, then:
a.
labor supply is shifted to the future.
c.
present GDP is reduced.
b.
labor supply is shifted to the present.
d.
future GDP is increased.
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51. If the time path of government purchases does not change and the government cuts current assets
income taxes, then:
a.
households save more and consume less in
the present.
c.
households save less and consume more in
the present.
b.
households save and consume less in the
present.
d.
households save and consume more in the
present.
52. The major peaks in the ratio of public debt to GDP in the U.S. reflect
a.
financing of wartime expenditures.
c.
major economic expansions.
b.
financing of Social Security.
d.
major increases in technology.
53. In a business cycle recession, the debt-to-GDP ratio typically
a.
falls.
c.
does not change.
b.
rises.
d.
either (a) or (c).
54. In a business cycle recession, the debt-to-GDP ratio typically
a.
falls because of an increase in debt.
c.
rises because of an increase in debt.
b.
falls because of an increase in GDP.
d.
rises because of an increase in GDP.
55. In a business cycle recession, the debt-to-GDP ratio typically
a.
falls because of an increase in debt.
c.
rises because of a decrease in debt.
b.
falls because of an increase in GDP.
d.
rises because of a decrease in GDP.
56. In a business cycle expansion, the debt-to-GDP ratio typically
a.
falls because of an increase in GDP.
c.
rises because of an increase in debt.
b.
falls because of a decrease in GDP.
d.
rises because of a decrease in debt.
57. Assuming that the nominal quantity of money is constant and there is no inflation, if the real public
debt decreases, the government budget shows
a.
an increase in the real deficit.
c.
a decrease in private bonds.
b.
an increase in real saving.
d.
a decrease in printing money.
58. Assuming that the nominal quantity of money is constant and there is no inflation, if the real public
debt increases, the government’s
a.
rate of money printing is greater than
50%.
c.
real saving is less than zero
b.
real saving equals zero.
d.
rate of money printing is greater than zero.
59. A government budget surplus
a.
is the same as the government’s real
c.
means that government saving is positive.
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saving.
b.
means that government revenue exceeds
its expenditure.
d.
all of the above.
60. Real national saving equals
a.
the change in the capital stock.
c.
both (a) and (b).
b.
net investment.
d.
net depreciation.
61. Real national saving is
a.
the difference between government and
household saving.
c.
both (a) and (b).
b.
the sum of government and household
saving.
d.
net depreciation.
62. An open-market operation in which the Federal Reserve purchases bonds will
a.
increase the money supply and increase
the price level.
c.
decrease the money supply and decrease
real GDP.
b.
decrease the money supply and increase
the price level.
d.
decrease the money supply and increase
real GDP.
63. An open-market operation in which the Federal Reserve sells bonds will
a.
increase the money supply and increase
the price level.
c.
decrease the money supply and decrease
the price level.
b.
decrease the money supply and increase
real GDP.
d.
decrease the money supply and increase
the price level.
64. An open-market operation in which the Federal Reserve purchases bonds will
a.
decrease the money supply and increase
real GDP.
c.
decrease the money supply and decrease
real GDP.
b.
increase the money supply but not change
real GDP.
d.
increase the money supply and increase
real GDP.
65. An open-market operation in which the Federal Reserve sells bonds will
a.
decrease the money supply and increase
real GDP.
c.
decrease the money supply and decrease
real GDP.
b.
increase the money supply and increase
real GDP.
d.
increase the money supply but not change
real GDP.
SHORT ANSWER
1. What is the government budget constraint when government borrowing is allowed?
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2. What are public, private and national saving and what is the implication of real national saving?
3. What are the effects of the government lowering taxes by $1 for one period in the market clearing
model with no transfer payments, the money stock fixed, no inflation and with a given time path of
government purchases?
4. What is the Ricardian equivalence theorem?
5. Why might a budget deficit make households feel wealthier after a tax cut?
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6. In the equillibrium business cycle model, what is the impact of an open market operation purchase by
the Federal Reserve?
ANS: