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Chapter 14 Deficit Spending and the Public Debt 637
29) Suppose that initially there is no public debt. Using the above table, what is the public debt as a
percentage of GDP in Year 4?
A) 5.8 percent B) 7.8 percent C) 3.6 percent D) 2.0 percent
30) Suppose that initially there is no public debt. Using the above table, what is the public debt as a
percentage of GDP in Year 3?
A) 1.7 percent B) 2.0 percent C) 7.7 percent D) 5.9 percent
31) The gross public debt is the
A) amount of U.S. paper currency and coins in circulation.
B) difference between current government expenditures and tax revenues.
C) ratio of past deficits to past surpluses.
D) total of all accumulated deficits and surpluses.
32) If the net public debt expanded last year, then which of the following most likely occurred
during the year?
A) The government s budget was balanced.
B) The government experienced a budget surplus.
C) The government experienced a budget deficit.
D) The government s tax collections exceeded its spending.
33) One mechanism through which increasing public debt may impact the economy is that the
resulting
A) increased competition for funds increases interest rates and causes a reduction in
investment.
B) increased competition for funds decreases interest rates and causes an increase in
investment.
C) decreased competition for funds decreases interest rates and causes a reduction in
investment.
D) decreased competition for funds decreases interest rates and causes an increase in
investment.
34) If the net public debt declined last year, then which of the following most likely occurred
during that year?
A) The government s budget was balanced.
B) The government experienced a budget surplus.
C) The government experienced a budget deficit.
D) The share of foreign holdings of the government s debt increased.
35) To evaluate relative changes in the net public debt, we must
A) look at the absolute amount owed by the government.
B) compare it to the nation s real GDP.
C) look at the annual percentage change in the public debt.
D) compare it to the debts of all developed countries.
36) Gross public debt is the amount of funds that
A) U.S. residents owe to foreign residents.
B) states owe to the federal government.
C) the federal government owes to taxpayers.
D) the federal government owes to all holders of U.S. securities.
37) Which of the following statements is false?
A) The federal budget deficit in 2004 was about 4 percent of the GDP.
B) A budget deficit of $25 billion in a given year increases the public debt by $25 billion.
C) The public debt of $25 billion is the accumulated debt of all U.S. individuals, firms, and
institutions.
D) During the past five years, the U.S. public debt has been increasing.
38) Net public debt is equal to
A) the gross public debt minus current year tax revenue collection.
B) the gross public debt minus taxes paid by foreign corporations on their profits made in the
United States.
C) the gross public debt plus all governmental interagency borrowing.
D) the gross public debt minus all governmental interagency borrowing.
39) Borrowing to finance the increases in government expenditures
A) reduces current private investment expenditures.
B) increases interest rates.
C) reduces growth in the nation s private capital stock.
D) all of the above
40) The two ways in which deficit spending can impose a burden on future generations are
A)
b
y requiring future generations to face higher taxes and to work with a lower accumulated
stock of capital goods.
B)
b
y requiring future generations to face lower government spending and to utilize a smaller
stock of human capital.
C)
b
y substituting private goods for public goods and thereby shifting resources to foreign
residents.
D)
b
y substituting private goods for public goods and thereby benefiting only large
businesses.
41) If the net public debt remains unchanged during a given period, but the gross public debt
increases, then which of the following statements must be correct?
A) Government interagency borrowing must have increased during the period.
B) Government interagency borrowing must have decreased during the period.
C) Foreign ownership of U.S. Treasury securities must have risen during the period.
D) Foreign ownership of U.S. Treasury securities must have fallen during the period.
42) Which of the following is the best measure of the total amount that the federal government owes
to private owners of U.S. Treasury securities?
A) Government interagency borrowing B) The government budget deficit
C) The gross public debt D) The net public debt
43) Which of the following correctly describes a way in which deficit spending can impose a burden
on future generations?
I. Failure to allocate deficit spending to uses that boost future real Gross Domestic Product
(GDP) will require taxing future generations at a higher rate to repay the resulting higher public
debt.
II. Government deficits that lead to higher employment and real Gross Domestic Product
(GDP) in the future will generate increased income taxes for future governments, which will
respond by spending the higher tax revenues, creating higher future government budget
deficits.
III. Other things being equal, deficit spending fuels increased consumption of goods and
services by the current generation that crowds out capital investment, thereby leaving future
generations with a smaller stock of capital than otherwise would have existed.
A) I only B) II only C) I and III only D) II and III only
44) Which of the following is true of the portion of the net public debt held by foreign residents?
A) It will definitely be a benefit to current and future generations of U.S residents, because
foreign residents have shown a willingness to lend to the U.S. government in exchange for
rates of return significantly lower than they can receive elsewhere in the world.
B) It will definitely be a burden on current and future generations of U.S. residents who will
have to pay interest on this portion of the debt, thereby transferring a portion of future
U.S. incomes abroad.
C) It will be a burden on future generations of U.S. residents only if funds that the U.S.
government obtains from borrowing are expended on projects with rates of return lower
than the rates of interest that the government pays foreign residents.
D) It will be a benefit to future generations of U.S. residents only if funds that the U.S.
government obtains from borrowing are expended on projects with rates of return lower
than the rates of interest that the government pays foreign residents
45) Net public debt is
A) the excess of annual government spending over annual tax revenues.
B) the excess of annual tax revenues over annual government spending.
C) the portion of government debt held by private individuals and firms.
D) the sum owed by the public to keep the Social Security system afloat.
46) To compare the net public debt of various countries, the debt has to be compared to
A) the country s trade deficit.
B) the country s current budget deficit or surplus.
C) the country s real GDP.
D) the country s national defense expenditure.
47) Explain how deficit spending could be a burden to future generations.
48) Explain how deficit spending can benefit future generations.
14.4 Federal Budget Deficits in an Open Economy
1) In which decade did the United States begin experiencing large trade deficits?
A) 1960s B) 1970s C) 1980s D) 1990s
2) Are federal budget deficits related to trade deficits?
A) Yes. If U.S. consumers buy too many imported goods they don t have money to save and a
budget deficit results.
B) No. The budget deficit is entirely a domestic matter while the trade deficit only affects U.S.
citizens who travel abroad.
C) Yes. As deficit spending goes up, it is likely government borrowing will, too. Then foreign
residents who lend funds to the U.S. government have less to spend on our goods, so U.S.
exports will fall.
D) Yes, but only if the quality of U.S. goods and services is deteriorating.
3) Which of the following statements has usually held true about the relationship between the
trade deficits and government budget deficits?
A) There is no relationship between trade deficits and budget deficits.
B) There is a positive relationship between trade deficits and budget deficits.
C) There is a negative relationship between trade deficits and budget deficits.
D) A relationship exists only when there is a balanced budget.
4) Historic data indicate that there is usually a ________ relationship between trade deficits and
federal government budget deficits.
A) positive B) zero C) negative D) fluctuating
5) A trade surplus occurs when
A) the value of imports is greater than the value of exports.
B) government spending is less than total tax revenue.
C) consumption is greater than disposable income.
D) none of the above.
6) Which of the following is true about how trade deficits and government budget deficits are
related?
A) The trade deficit leads to a reduction in investment that leads to a government budget
deficit.
B) The trade deficit leads to a decline in imports relative to exports that leads to a
government budget deficit.
C) The government budget deficit leads to higher interest rates that will lead to a trade
deficit.
D) The government budget deficit leads to lower interest rates that will lead to a lower trade
deficit.
7) When foreign residents buy U.S. Treasury securities to finance the budget deficit,
A) we can also anticipate an increase in the trade deficit.
B) we can also anticipate a decrease in the trade deficit.
C) the trade deficit will not be affected.
D) the public debt will be reduced.
8) Historical evidence seems to indicate that
A)
b
udget and trade deficits generally move in the same direction.
B)
b
udget and trade deficits generally move in the opposite direction.
C) there is no consistent relationship between trade and budget deficits.
D) trade and budget deficits decrease when the president is a Republican, and increase when
the president is a Democrat.
9) Which of the following is true of the relationship between U.S. trade deficits and federal
government budget deficits?
A) Increases in the budget deficit tend to be associated with increases in the trade deficit.
B) Increases in the budget deficit tend to be associated with reductions in the trade deficit.
C) Increases in the budget deficit are always associated with increases in the trade deficit.
D) Increases in the budget deficit are always associated with reductions in the trade deficit.
10) Which of the following is true of the U.S. trade balance and the federal government budget?
A) In most years since the 1970s, both have been in surplus.
B) In most years since the 1970s, both have been in deficit.
C) Both exhibited greater variability before the 1970s than they have since.
D) The federal government budget deficit was more variable before the 1970s, but the trade
deficit has been more variable since.
11) Are federal budget deficits related to trade deficits?
A) Yes. If U.S. consumers buy too many imported goods, they do not have funds to save, and
a budget deficit results.
B) No. The budget deficit is entirely a domestic matter, while the trade deficit only affects
U.S. citizens who travel abroad.
C) Yes. Higher deficit spending goes up results in more government borrowing, and foreign
residents who lend funds to the U.S. government have fewer resources to spend U.S.
export goods.
D) Yes, but only if the quality of U.S. goods and services is deteriorating
Chapter 14 Deficit Spending and the Public Debt 645
14.5 Growing U.S. Government Deficits: Implications for U.S. Economic Performance
1) What is the short run effect of increased deficit spending on an economy experiencing a
recessionary gap?
A) Aggregate demand increases, and the gap closes.
B) Aggregate supply increases, closing the gap.
C) Aggregate demand decreases, and the gap widens.
D) Aggregate demand will increase, creating an inflationary gap.
2) In the long run, what effect does a government s deficit spending have on equilibrium real
Gross Domestic Product (GDP)?
A) The government s deficit spending will increase equilibrium real Gross Domestic Product
(GDP).
B) Deficit spending will decrease the nation s equilibrium real Gross Domestic Product
(GDP).
C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP)
above the full employment level.
D) Equilibrium real Gross Domestic Product (GDP) will increase beyond the full employment
level and there will also be an inflationary effect.
3) One of the long run effects of higher government budget deficits is
A) a redistribution of real Gross Domestic Product (GDP) away from government provided
goods and toward more privately provided goods.
B) an increase in the government s share of the nation s economic activity.
C) growth in the economy s private sector at the same time the government sector shrinks.
D) a fall in the equilibrium price level.
4) Why is it unlikely that tax increases will be the way to eliminate current U.S. federal budget
deficits?
A) Increasing every worker s taxes by the same amount could eliminate the deficit, but it is
likely this action would be viewed as too burdensome for workers with modest incomes.
B) The revenues generated by increasing taxes on the rich would only pay for a small portion
of the federal budget deficit in any recent year.
C) Since World War II, on average when taxes were increased by a dollar, federal government
spending increased by that much and more.
D) All of the above.
5) The largest expenditure component of the federal budget is spending on
A) the military. B) entitlement programs.
C) environmental protection programs. D) foreign aid.
6) Guaranteed benefits under government programs such as Social Security or Medicare are called
A) discretionary spending. B) controllable expenditures.
C) entitlements. D) automatic stabilizers.
7) Today, U.S. government spending on entitlements represents ________ of the total federal
budget.
A) about 10 percent B) less than 25 percent
C) nearly 60 percent D) nearly 90 percent
8) Which is the fastest growing component of the federal government budget?
A) Spending on the military and the war on terrorism
B) Spending to improve the nation s schools
C) Spending to improve and expand the nation s infrastructure
D) Spending on entitlements
9) In the long run, what effect does a government s deficit spending have on equilibrium real
Gross Domestic Product (GDP)?
A) Government deficit spending will increase equilibrium real Gross Domestic Product
(GDP).
B) Deficit spending will decrease the nation s equilibrium real Gross Domestic Product
(GDP).
C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP)
above the full employment level.
D) Higher government deficits will raise equilibrium Gross Domestic Product (GDP) above
the full employment level and also have an inflationary effect.
10) In the long run, a higher government deficit does not affect equilibrium real Gross Domestic
Product (GDP), so that continuous increases in the government deficit will
A) lead to greater tax revenues.
B) reduce the price level.
C) reduce spending on privately provided goods and services.
D) increase the unemployment rate.
11) In the long run, a higher government budget deficit causes
A) a decrease in both private spending and equilibrium real GDP.
B) an increase in both private spending and equilibrium real GDP.
C) a decrease in private spending while equilibrium real GDP remains unchanged.
D) no change in private spending but a decrease in equilibrium real GDP.
12) The largest component of U.S. federal spending that contributes to the U.S. government budget
deficit is
A) entitlements. B) military spending.
C) interest expenses. D) salaries of government employees.
13) When analyzing the effects of the government budget deficit,
A) no distinction must be made between an economy where full employment exists and one
where substantial unemployment exists.
B) it is important to examine the effects of the reported capital budget and the reported
operating budget separately.
C) there should be a comparison of the effect of the deficit to the effects of higher taxes
needed to eliminate it.
D) the baseline budget should be used since it is the most accurate.
14) In the short run, a fiscal policy action that results in a reduction in the size of the budget deficit
will cause
A) an increase in real GDP with stable prices if the economy was below full employment.
B) a reduction in real GDP with falling prices if the economy was below or at full
employment.
C) an inflationary gap if the economy was initially operating at full employment.
D) an inflationary gap if the economy was initially operating below full employment.
15) Suppose the economy is initially experiencing a short run recessionary gap. An increase in the
size of the budget deficit will
A) increase the size of the recessionary gap.
B) reduce the size of the recessionary gap.
C) lead to an increase in prices with no increase in real GDP.
D) lead to a decrease in prices with an increase in real GDP.
16) Suppose the economy is initially operating at full employment. A reduction in the size of the
budget deficit will cause which of the following in the short run?
A) a recessionary gap.
B) an increase the price level and a reduction in real GDP.
C) an increase in the price level with no change in real GDP.
D) an increase in real GDP and an increase in the price level.
17) Suppose the economy is initially operating at full employment. A fiscal policy action that
results in an increase in the size of the budget deficit will cause which of the following in the
long run?
A) an increase in real GDP.
B) have no effect on both the level and composition of real GDP.
C) a reduction in the price level.
D) change the composition of real GDP.
18) In the long run, higher government budget deficits will
A) lead to a redistribution of real GDP from privately produced goods and services to
government produced goods and services.
B) lead to a redistribution of real GDP from government produced goods and services to
privately produced goods and services.
C) cause the price level to go down on government goods but not on private goods.
D) lead to a reduction in the amount of goods and services produced by the government and
private sector.
19) What is the difference between the short run and the long run when there is full employment
and the government engages in deficit spending?
A) Real GDP will increase in both the short run and the long run.
B) Real GDP will increase in the long run but not the short run.
C) Real GDP will increase in the short run but not the long run.
D) Real GDP will not increase in either the long run or the short run.
20) Which of the following has NOT been proposed as a possible economic solution to reducing the
government deficit?
A) Reducing expenditures B) Increasing taxes for the rich
C) Increasing the number of entitlements D) Increasing taxes for everyone
21) As a possible approach to eliminating the government budget deficit, increasing taxes for
everyone would
A) mean only a small increase in taxes.
B) lead to an inflationary gap.
C) transfer more goods and services to the government sector.
D) lead to a large increase in taxes for every worker.
22) As a possible approach to eliminating the government budget deficit, increasing taxes on the
rich only would
A) lead to a significant increase in tax revenues.
B) not lead to a significant increase in tax revenues.
C) lead to a greater number of entitlements.
D) lead to an increase in real GDP.
23) An entitlement is
A) government spending on things like military salaries.
B) guaranteed benefits under some government programs.
C) another word for a government budget surplus.
D) the payments to the private sector in exchange for goods and services.
24) Legislated federal government payments that anyone who qualifies can receive are called
A) controllable expenditures. B) a fiscal stabilizer.
C)
b
alanced expenditures. D) entitlements.
25) Which of the following is NOT an entitlement?
A) Medicaid B) Social Security
C) Federal government salaries D) Medicare
26) Among economists, it is generally believed that
A) the federal budget deficit will be eliminated within 10 years.
B) the public debt will be paid off within 10 years.
C) entitlement spending will continue to decline.
D) the federal government will find it difficult to cut entitlement programs.
27) Government spending that changes automatically without action by Congress is
A) a noncontrollable expenditure.
B) national defense.
C) payments to contractors for routing services performed.
D) discretionary payments.
28) The fastest growing part of the federal budget is
A) national defense. B) payments for services rendered.
C) entitlements. D) government salaries.
29) Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the
budget deficit will cause which of the following in the short run?
A) a reduction in the size of the recessionary gap and increase in real GDP.
B) an increase in the size of the recessionary gap and decrease in real GDP.
C) an increase in inflation and increase in aggregate supply.
D) an inflationary gap.
30) If the economy is experiencing an inflationary gap in the short run, an increase in the budget
surplus
A) will reduce the size of the inflationary gap.
B) will increase the size of the inflationary gap.
C) will cause an increase in inflation and increase aggregate supply.
D) will increase aggregate demand and will increase the price level.
31) Suppose the economy is initially operating at full employment. A reduction in the size of the
budget deficit will cause which of the following in the long run?
A) a recessionary gap. B) a reduction in real GDP.
C) an inflationary gap. D) none of the above.
32) Noncontrollable expenditures are called noncontrollable because
A) they increase at the same rate as the public debt.
B) they change without congressional action.
C) only the president can approve these entitlement payments.
D) the political process determines the size of the payments.
33) Politicians have suggested that the budget deficit could be reduced by
A) increasing taxes and reducing expenditures.
B) lowering the interest rates.
C) imposing higher tariffs on imported goods.
D) forbidding interest payments on government bonds outsourcing.
34) Which government program would be considered an entitlement program?
A) national defense B) subsidies for mass transportation
C) law enforcement in major U.S. cities D) Social Security
35) The fastest growing component of the annual federal budgets since 2000 is
A) the education budget. B) entitlement payments.
C) funding for health research. D) funding for NASA.
36) The long run effect of increasing government budget deficits
A) is a redistribution of real GDP from privately provided goods to government provided
goods.
B) is no impact on equilibrium real GDP.
C) is to increase of price level.
D) all of the above
37) Which of the following statements is correct?
A) Since the mid 1940s, expenditures on national defense have increased considerably as a
percentage of total federal government spending.
B) Since the mid 1940s, expenditures on income security and health programs have increased
considerably as a percentage of total federal government spending.
C) Taken together, expenditures on national defense and on income security and health
programs now account for less than half of all federal government spending.
D) Expenditures on national defense now account for more than twice as much federal
government spending as expenditures on income security and health programs.
38) By approximately how much would the federal government have to raise each worker s annual
taxes to eliminate the current federal budget deficit?
A) Between $50 and $100 per year B) Between $500 and $1,000 per year
C) Between $1,500 and $2,500 per year D) Between $5,000 and $7,000 per year
39) What are the macroeconomic consequences of a budget deficit when the economy is operating
at full employment? Be sure to discuss the effects in the short run and in the long run.
